A dilemma now confronts anyone with investments in China. The benchmark Shanghai Shenzhen index has shed as much as 24 per cent of its value in the past year, amid alarm over the Beijing government’s crackdown on tech companies.
This week the regulatory net spread wider. Shares in Macau casinos fell by a third as Beijing began a rigorous consultation into their licences to operate in the region, the world’s gambling hub.
A drive for digital sovereignty lies behind this policy, the desire to gain control of the data that tech giants garner through every transaction, endowing them with influence that potentially threatens the Chinese state.
China’s benchmark Shanghai Shenzhen index has shed as much as 24 per cent of its value in the past year, amid alarm over the Beijing government’s crackdown on tech companies
More openly, President Xi Jinping aspires to increase ‘common prosperity’, benefiting lower-income households excluded from expensive online tutoring and other chances for improvement – and possibly spending too much time playing video games.
These are to be restricted to three hours a week for the under-18s.
But Xi’s other ambition is said to be to turn China into what one analyst has termed a ‘techno-authoritarian superpower’ by curbing the power of its big tech and its outspoken bosses.
Jack Ma, founder of the Alibaba banking, shopping and search engine group, has already shrunk into the background. Over the past year, shares in this $434billion (£313billion) US-listed leviathan have slumped by 44 per cent.
This week big tech received another diktat. Alibaba and the equally mighty Tencent, developer of video games and owner of the massively popular Wechat app, were ordered to open up their ‘walled garden’ systems, which are inaccessible to each other.
Beijing is also breaking up Alipay, an app with about 1bn users which is owned by Ant Financial, an Alibaba division.
A separate app must be created for Alipay’s loans division. Chinese authorities blocked a £25billion Ant Financial share sale last November.
Is the Chinese government’s stance a signal to steer clear? After all, the country’s entrepreneurial spirit has been the main reason to invest there.
Or will more data security be part of a reset that makes the Chinese administration hugely more efficient and helps all companies become more productive? Also, Alibaba and Tencent are the jewels in China’s economic crown. Why destroy them?
Opinions are divided on what lies ahead, adding to the confusion for investors in best buy funds like Fidelity China Special Situations, Invesco China Equity, JP Morgan China Growth and Income and Baillie Gifford China Growth.
So what could be the upside of Beijing’s more interventionist stance? Howard Wang of JP Morgan believes that some stocks look enticing on a ‘multi-year view’.
Jack Ma (pictured), founder of the Alibaba banking, shopping and search engine group, has seen shares in this $434billion (£313billion) US-listed leviathan Alibaba slump by 44 per cent
Dale Nicholls, manager of the Fidelity China Special Situation, agrees, saying that, while that current conditions may be risky, ‘many tech companies are now trading at historical low valuations – and at significant discounts to global peers’.
It is possible Chinese tech shares could fall further. The closely watched US fund manager Cathie Wood has reduced her Ark funds’ exposure to Tencent, JD.com, the ecommerce business and Baidu, the artificial intelligence specialist.
It is clear that investing in China has become more of a gamble, but as Paras Anand, chief investment officer for the Asia Pacific region at Fidelity, points out, regulatory intervention has happened before in China.
Scottish Mortgage is one of my long-standing holdings because it appeals to my adventurous side. Anyone with money Chinese funds and trusts (the simplest way to invest in this market) should also be phlegmatic about Beijing’s policy reversals.
But can investors hope that the tough stand on big tech could be accompanied by a change in attitudes towards the environment and social issues?
Kathlyn Collins of Matthews Asia says that China’s leaders understand that ‘transforming from an economy dependent on highly-polluting heavy industry to an economy focused on clean energy, services and innovation is essential, not only to the future of the planet, but to China’s own prosperity’.
All investors should be watching closely, because what happens in China will matter more and more to the whole world.
Share of the week… Kingfisher
WHILE the pandemic savaged sales for many retailers, B&Q and Screwfix-owner Kingfisher celebrated 2020 as one of its best years in some time.
The firm benefited from a DIY boom as homeowners took to making improvements during lockdown, and boss Thierry Garnier’s turnaround plan finally seems to be paying off.
The question for investors, however, is whether Kingfisher can sustain its momentum as it prepares to unveil its first-half results on Tuesday.
Garnier seemed to think so. In a trading update in July, he raised his sales forecast after a 64 per cent gain in the first quarter – despite flagging a 1.3 per cent drop in sales for the second quarter.
Kingfisher guided to first-half profits of between £645million and £660million, up from previous projections of between £580m and £600m and against £415m a year ago.
But analysts will be looking for any guidance relating to the second half of the year, and whether the final six months of 2021 will be able to show any improvement on a very strong period a year ago.
They are pencilling in a fall in sales over the period of 6.6 per cent, leaving like-for-like numbers down 1.9 per cent for the entire year.
And shareholders will be eager for news on the dividend. A run of nine straight increases ended in the year to January 2019, as the business planned a shake-up, and cancelled its final dividend a year later as the pandemic struck.
In March it announced a full-year dividend of 8.25p for the year ending in January 2021, and investors will now be hoping for an interim payout.
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