We have seen a decline in Chinese stocks in recent weeks, and the question arises: is it profitable to invest in them now?
Shares of Chinese companies Shares of Chinese companies
It would seem that, the cheaper the shares become, all the better: you can buy more shares for one amount and the growth potential will be greater. Let me remind you, that my strategy is precisely, to increase purchases on market drawdowns.
However, investing is not always that simple.. Stocks don't just fall. A fall is always accompanied by negative news or crisis trends. Therefore, you must always sensibly analyze the market situation..
What are the reasons and origins of the recent fall in Chinese stocks? At the end of July, the Chinese Communist Party began tightening its regulation of the online education market.: compulsory registration as non-profit companies, prohibition to go to IPO and attract foreign capital. Simply put, the authorities decided to nationalize an entire sector in the economy.
As a result, shares of educational companies in China collapsed by 50-70%. Given the severity of government reforms, we will hardly be able to see the recovery of these companies in the future, at any rate close- and medium-term.
China Stock MarketChina Stock Market
In this case, one of the main risks in investments played - the risk of nationalization of the economy. This risk is higher in emerging markets, what we see in relation to China. Unlike Western markets with a fully market economy, emerging markets are still dependent on a "tough hand" from above. And it is always very difficult to predict the actions of this hand..
In this way, my position with regard to educational companies in China is unambiguous - do not buy. The prospect of becoming state-owned companies does not bode well for development and profit growth.
After the collapse of educational stocks, investors scared, that tightening will affect other areas of the Chinese economy. Against this background, the shares of the IT giants of the Middle Kingdom began to fall, such as Alibaba, Tencent, Baidu, Didi and others.
However, there are no direct threats to business here., excluding pinpoint penalties, for example, as it was with Alibaba and Didi. If educational companies occupy a small part of China's economy, then such giants as Alibaba are a whole system, including not only online trading, but also payment systems, entertainment, media, cloud computing and many other areas.
Rough interference in the operation of such a system can disrupt internal processes and throw China's development in the IT field back for several years.. In other words, the desire of the Chinese authorities to turn the country into a second DPRK seems absurd. However, this is only purely my opinion.. Although the Chinese government itself spoke at a meeting with investment banks that, that he is not going to close his market.
Therefore, in terms of technological advanced companies in China, my position at the moment is positive.. I like Alibaba: growth of financial indicators judging by the latest reports, expansion and development of new markets, increase in users by tens of millions every quarter.
Despite the apparent appeal of large and stable Chinese companies, there is another important risk. Already under the current legislation of the Celestial Empire, foreign investors cannot invest in Chinese companies., buying their shares. This law has existed since the 2000s. But in the context of modern globalization, it seems absurd. What development and progress can be without external investment?
We can easily buy Chinese stocks on the exchange. It's all about, that these are not shares, and special VIEs - Variable interest entities - structures with variable interest. They are invented, to circumvent the law prohibiting foreign ownership of companies.
VIE is an offshore company with no real assets on its balance sheet. Everything, what does it have - agreements with the parent company about, that she has rights to the profits and dividends of the parent company. They are the ones who are traded on stock exchanges., and we buy them. Alibaba Group Holding, which is traded on the exchange is not Alibaba's own person, and his VIE.
It's about the same, what with ETF: you do not buy or own the shares themselves. You buy a "gasket" in the form of shares of the management company - ETF, which already directly owns shares.
The Chinese government turns a blind eye to this case., because. without this there will be no foreign investment in the country, respectively, there will be no development. Sometimes, like now, there are threats and fears about closing this loophole. Then everyone forgets about it and a new growth cycle begins.. I, as I wrote above, I cannot imagine it is possible to block the country's access to foreign investment.
Therefore, when investing in Chinese stocks, you need to take into account the complex of risks and make an appropriate discount to the price of their shares.. As with any investment, you cannot invest a large amount at once. Better little by little (ladder) gain positions of stable, large and stable companies. For example, I bought just one share of Alibaba worth 14 130 rub. Is just about 0,5% from all my investments.
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