Hi FH, the Chinese tech stocks are reaching one low after another, take Kuaishou as example.
The method of averaging in doesn’t seem to work well in this free falling environment.
Many of my counters are bleeding, turning from profit previously.
Can you advise? Thanks
Me too, anonymous FH Reader, me too.
My China tech portfolio has gone from being up 30% – 40%, to being down 30%. With much of the pain coming from the past 5 days.
So if this is you, the first thing you need to do is to forgive yourself. Don’t beat yourself up too much, and don’t let emotions cloud your decision making.
Because even the big boys like Temasek were hit.
In this article, I wanted to share my personal views on how to approach the issue.
A lot of you have asked for the best China ETFs to buy to get exposure to China (as a Singapore investor). So we’ll cover that too.
BTW – we share commentary on financial markets every week, so do sign up for our mailing list.
Timeline of China Tech Crackdown
The entire timeline to date:
Nov 2020: China pulls the Ant Financial IPO, and begins a crackdown on Ant Financial
Jan 2021: Crackdown expands to other China tech companies such as Meituan, Pinduoduo, Tencent Music etc
March 2021: Pinduoduo CEO steps down to “focus on other pursuits”
May 2021: Bytedance CEO steps down
14 July 2021: Crackdown on Didi following their US IPO. Suggestions that the VIE loophole is being relooked
23 July 2021: China cracks down on the Edutech sector – suggestions they will make the entire sector non-profit. TAL Education closes down 70%.
25 July 2021 – Tencent Music ordered to terminate exclusivity agreements with music producers.
*Update* 17 August 2021: China unveils a set of draft regulations setting out a long list of prohibited behaviours for Chinese internet companies, triggering another wave of selling.
At the same time, China announces plans to take a 1% stake and a board seat in Bytedance, and is likely to do the same for many other China tech companies.
*Update* 20 August 2021: Chinese Communist party mouthpiece the People’s Daily called for greater regulation of prescriptions filled using online platforms. The safety of online prescription drug sales had “become a topic of social concern”, it said.
Ping An Healthcare and JD Health fell more than 15 per cent.
Buy the Dip no longer works for China Tech Stocks?
For long term investors – the thought process is the same (especially so in times like this):
- Do you like the stock on a long term, fundamental level at this price?
- If no – What is the best way to exit your position while minimising losses
- If yes – Do you have dry powder to average in?
- If Yes – How long you want to average in for?
- If No – Just sit tight and hang on! Why worry? If it helps just stop checking prices everyday (only keep up with the fundamental China news).
Do you like the stock on a long term, fundamental level at this price?
I’ll share my broad framework for approaching Question 1, and hopefully it comes in handy.
Why is China cracking down on Tech Stocks?
As shared in a previous article, I think China is cracking down on tech stocks to get them to comply with 2 rules:
- Rule 1 – Comply with national policy objectives
- Rule 2 – Sustainable competition (no anti-competitive practices)
But this is merely the action. It is not the end game in itself.
Think of it like trying to win a race.
The 2 rules above, is the plan to win the race. You run everyday to train, and have a plan to beat your competition.
It’s tactics, not strategy.
To truly understand this crackdown, we need to know China’s end game. What “race” is China trying to win?
What is China’s (or Xi’s) end game?
George Soros penned a fascinating article in the Wall Street Journal, that I highly recommend reading.
I extract the key snippets below.
“Mr. Xi realized that he needs to remain the undisputed ruler to accomplish what he considers his life’s mission. He doesn’t know how the financial markets operate, but he has a clear idea of what he has to do in 2022 to stay in power. He intends to overstep the term limits established by Deng, which governed the succession of Mr. Xi’s two predecessors, Hu Jintao and Jiang Zemin. Because many of the political class and business elite are liable to oppose Mr. Xi, he must prevent them from uniting against him. Thus, his first task is to bring to heel anyone who is rich enough to exercise independent power.
Mr. Xi is engaged in a systematic campaign to remove or neutralize people who have amassed a fortune.
This campaign threatens to destroy the geese that lay the golden eggs. Mr. Xi is determined to bring the creators of wealth under the control of the one-party state. He has reintroduced a dual-management structure into large privately owned companies that had largely lapsed during the reform era of Deng.
In other words, he has turned them into his own yes-men, abolishing the legacy of Deng’s consensual rule. With Mr. Xi there is little room for checks and balances. He will find it difficult to adjust his policies to a changing reality, because he rules by intimidation. His underlings are afraid to tell him how reality has changed for fear of triggering his anger. This dynamic endangers the future of China’s one-party state.”
20th Party Congress – Xi to remain in power for a third term?
Now there is no way of knowing China’s true end game with certainty.
The only person who knows is Xi, and unlike certain US Presidents, he doesn’t share freely.
With China, there’s always subtle meaning behind each action. There is always more than meets the eye.
And the more I think about it, the more I come back to the 20th Party Conference in 2022.
Xi’s third term, where he wants to break the established system of succession, and remain President for a third term (possibly for life).
If you’re Xi, and you want to remain in power – what do you need to do?
- Take out political opponents
- Gain legitimacy of the people by ruling well – gaining the “Mandate of Heaven” (天命)
The tech crackdown kills 2 birds with one stone.
It takes out prominent tech billionaires, who are now too busy rebuilding their wealth (or now lack the resources) to oppose you short term.
The people love it because it breaks the monopoly of tech giants, and purports to increase living standards for all.
All dressed up in the name of solving inequality and sustainable long term growth.
Long term, is China still a good investment?
I’ve been to China almost every year the past 10 years. In some years, multiple times.
In that period, I’ve witnessed first-hand China’s mindblowing growth – from student of Singapore, to having surpassed Singapore many times over.
I’ve also witnessed the emergence, then growth, then monopoly of China tech giants like Tencent and Alibaba.
And I agree that the tech crackdown is long overdue.
Tencent and Alibaba in their early days were value adding. Remember when Tencent had the Red Packets over Chinese New Year for WeChat Pay, and when Taobao was the best thing since sliced bread?
Along the way, they got too big for their own good. They moved from value creation, to value extraction.
The landlord moved away from building houses, to collecting rent.
Given China’s phase of development, this was not acceptable. A move like this was long overdue.
Don’t miss the forest for the trees
But don’t miss the forest for the trees here.
The vibrancy and dynamism of the China is unparalleled.
I wasn’t alive in the US in the 1920s, but if I did, I imagine this is what it would feel like.
The raw power, vibrancy – and the sense of inevitability that this country is destined to become a great power. You feel it in your bones and in the people.
It’s 1.4 billion people struggling to create a better life for themselves.
The closest parallel I can think of is the US in the 1920s. Sure, the Great Depression lay ahead, but the growth of the US was a century long story.
As long as the CCP creates a stable platform for them to do so, China will return to prosperity, as it has many times in history.
Where is the bottom for China Stocks?
A big warning though – this isn’t like March 2020 where you just track Fed policy moves and invest accordingly.
This one is more political, more insidious.
If I were to try and make an educated guess – it will revolve around the 20th Party Congress in late 2022.
So policy wise, it may “bottom” out by 2H2022 (the 20th Party Congress).
Stocks tend to be forward looking, so perhaps stocks bottom out in 1H2022? Which would suggest averaging in over a 6 – 12 month period.
But again, this is just a guess, and I could be wildly wrong.
How am I investing in China?
The problem though, is that just because China will eventually become a great power, doesn’t mean every stock will go up.
Each industry needs to be evaluated on its own merits, and each stock on a case by case basis. The bull case for Alibaba is very different from that of Meituan.
You can’t generalise here.
What I would say is that this looks to be systematic, institutional selling.
Lots of people would have been margin called by now, possibly more to come.
So the short term will be volatile. Very tough to call the bottom on this one, especially when the regulatory crackdown is still playing out.
But personally I am bullish with a longer term perspective. I’ve been averaging in, and will continue to do so going forward.
But really – every stock needs to be evaluated on an individual basis. It’s very hard to generalise and say every China tech stock is a good buy at this price.
There are going to be winners and losers from this round of regulatory crackdown.
Watch your risk appetite
Just like in March 2020, I’m only putting in money I don’t need, or that I can afford to lose.
You need to decide if that holds true for you.
If you can’t stomach the loss, then China stocks might just be uninvestable for you.
If so, best to let it play out in full. Sure you may miss the bottom, but it’s better than catching a falling knife.
Best China ETFs to buy for Singapore Investors (2021)
A lot of you have asked for the best China ETFs to buy for Singapore Investors, so I’ll run through the big ones.
Investing in China – ETF or DIY?
Do note that this isn’t like the US where you just buy the S&P500 and be done with it.
China’s market is less efficient – lots of companies are still private or consolidating, and passive indexing doesn’t work so well.
Active investing is best if you have the ability and willingness to commit to it. Especially in times like this where you can pick selectively.
But I get that not everyone active invests, so the next best thing is to ETF.
Best China ETFs to buy for Singapore Investors (2021)
I’ll just keep it very simple:
For broad exposure to China:
- iShares MSCI China ETF (MCHI or 2801) or
- iShares China Large-Cap ETF (FXI)
For pure China tech exposure
- KraneShares CSI China Internet ETF (KWEB) or
- Hang Seng Tech (3067)
- Lion-Ocbc Securities China Leaders ETF
- Invesco China Technology ETF (CQQQ)
iShares MSCI China ETF (MCHI or 2801)
Expense Ratio: 0.61%
AUM: $6 billion
Probably my favourite ETF for investing in China.
Gives you exposure to the onshore China listed A shares, Hong Kong H shares, and the US listed shares. Both tech and non-tech.
Expense Ratio is not cheap at 0.61%, but that’s usually the case for an ETF that has exposure to onshore A shares (and in line with most ETFs on this list).
As with any China ETF, big exposure to the usual big names like Tencent, Alibaba, Meituan.
AUM is decent enough at 6 billion USD, also the biggest China ETF.
Expense Ratio: 0.74%
AUM: $4.8 billion
iShares China Large-Cap ETF (FXI) is a decent alternative to MSCI China.
Expense ratio is about the same, and AUM is decent as well.
Less concentrated in the big names like Alibaba, Tencent and Meituan, with more exposure to the non-tech names. Ultimately down to personal preference.
Expense Ratio: 0.73%
AUM: $5 billion
If you want a pure China tech ETF (a NASDAQ for China), KWEB is probably the best choice.
Invesco China Technology ETF (CQQQ) is an alternative. It has a slightly lower 0.7% expense ratio but much lower AUM at $1.4 billion.
My preference is to always go for the one with larger AUM (for better liquidity), so KraneShares CSI China Internet ETF (KWEB) is still my preferred choice.
iShares Hang Seng TECH ETF (3067)
Exchange: Hong Kong (HKEX)
Expense Ratio: 0.25%
AUM: $1 billion
Hang Seng Tech is an alternative way to get exposure to the HK listed China tech companies.
The problem is that it doesn’t include the US listed China shares, or the onshore A shares. So as a single ETF it may not be sufficient.
It’s will improve over time as more China companies move to dual list in Hong Kong.
Very cheap fees as well.
You can buy it via the HK listed 3067.HK (iShares Hang Seng Tech ETF) or the Singapore listed HST (Lion OCBC Hang Seng Tech).
Lion OCBC Hang Seng Tech has a higher expense ratio (0.68% vs 0.25%), and very poor liquidity (4 million shares a day). So my preference would be the HK listed counter.
Lion-OCBC Securities China Leaders ETF
Exchange: Singapore (SGX)
Expense Ratio: 0.45%
AUM: $60 million (USD)
A lot of readers have been asking about Lion-OCBC Securities China Leaders ETF.
It tracks the 80 largest Stock Connect-eligible Chinese companies, so it’s definitely an decent ETF:
But on to the problems, where do I even start:
- No exposure to US listed shares (eg. Alibaba is not included)
- Low liquidity (800,000 a day)
- 45% bid-ask spread
- 45% management fee
I mean the only good thing about Lion-Ocbc Securities China Leaders ETF is that it’s SGX listed.
If you can, I would suggest going with one of the other options above. You can get much better exposure, and much better liquidity.
Which China ETF would I buy?
No need to overcomplicate matters.
MCHI or FXI if you want broad China exposure. KWEB if you want pure China tech.
That’s about it really.
Closing Thoughts: China Tech a falling knife?
It’s funny how quickly tables turn.
Last year’s poster boy is this year’s uninvestable asset class.
But if you want to succeed in long term investing, you really need to filter out the noise.
Reason from first principles, and focus on the longer term. Invest counter-cyclically.
Personally I am bullish with a longer term perspective. I’ve been averaging in, and will continue to do so going forward. But really – every stock needs to be evaluated on an individual basis. It’s very hard to generalise and say every China tech stock is a good buy at this price.
And it’s also a falling knife – very tough to call the bottom on this one.
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Whether you agree or disagree with me, share your views below and we can continue the discussion.
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