Don’t buy Chinese tech stocks.
I’m not saying to avoid them because of Chinese Xi Jinping’s “common prosperity” campaign, although that isn’t ideal.
The Eastern European war has meant draconian sanctions levied on the Russian economy and these sanctions also have a tech angle to them, particularly a Chinese tech angle.
Chinese companies could find themselves subject to regulatory fines and other penalties for breach of sanctions if they continue to work with targeted Russian entities.
In effect, we could see a sudden exodus of Chinese tech companies from Russia if they determine that the juice isn’t worth the squeeze.
The same avoidance is happening with ships circling America with Russian oil, are buyers of these commodities certain they won’t face sanctions if they buy Russian oil?
Policy becomes quite muddled when a band of politicians shouts new proposals for harsh sanctions and it affects the middleman as much as the end buyer.
If Chinese companies bolt Russia, many Chinese companies would need to take a revenue haircut and guide down.
Under US export sanctions imposed on Russia, any technology goods made in foreign countries using US machinery, software or blueprints will be banned from being exported to Russia. So you see how this applies directly to Chinese tech firms in Russia. Companies in Taiwan, South Korea, and Japan have quickly said they will comply.
Chinese laptop maker Lenovo has already shut down manufacturing and sales in Russia.
The Chinese are mercantilist and their much-publicized friendship with Russia doesn’t mean it will stay strong forever.
I don’t want to wade into politics but if Russia becomes too much of a pariah, Chinese tech firms might also reconsider the reputational risk at stake.
They aren’t the only ones to stop sales to Russia.
Rival Dell and chip supplier Intel have also closed up shop.
This has all led to a great de-risking of Chinese tech and I believe readers need to abstain from reading Wall Street research urging you to buy the Chinese tech dip.
Owning Chinese tech stocks, in general, is a terrible idea even though Berkshire’s Charlie Munger has doubled down on Alibaba (BABA) shares.
He has lost a lot of money from that trade and I find it ironic that Munger complains a lot about how bad America is and plays the fearmongering card yet his own money is in Alibaba shares.
The pain hasn’t been confined just to Alibaba, food delivery giant Meituan sold off again after Beijing on Friday ordered it to cut fees.
Tencent is facing new scrutiny of its core businesses.
The Hong Kong Hang Seng Index has more than halved from last year’s February peak with Beijing’s anti-monopoly campaign far from over.
Earnings will drop significantly as higher costs from increasing social responsibility incrementally handcuff Chinese tech companies from making decisions best for their shareholders.
The technology sector’s bullish run had lasted for decades before the “common prosperity” push brought it to an abrupt halt. The clampdown that began in late 2020 has hit almost every corner in the industry, from data security, digital business to online games and overseas listings.
The impact on tech earnings will be on show again on Thursday when Alibaba is due to report an estimated 60% drop in quarterly profit.
All told, this has been a highly negative past 7 days for autocratic regimes in the East as the West finally did an about-face to the status quo of turning a blind eye to corrupt money and deployment of power that lassoed crony capitalists.
Avoid all Chinese stocks and don’t follow Mr. Munger into Alibaba (BABA).
