As the delta variant of the Covid pandemic continues to work itself back into the lives of the vaccinated population even as the unvaccinated struggle to procure enough supplies to inoculate themselves, we turn our attention to the country that began this pandemic in the first place – China. In a country where authoritarianism prevails, the crackdown by the Chinese government into corporations has now extended into tutoring companies with a simple comment by Xi Jinping who smiled and let a policy bombshell loose saying “We should not let out of school tutors doing things in place of teachers”. Following that comment, the government mandated that tutoring companies should become non-profits. Immediately, stocks of tutoring companies began a sell off that erased ~$1.5 billion. 

The education sector thus became the latest victim following the high profile IPO crackdown of Ant Group and Didi earlier this year. The Chinese government had long held strict control on banking and oil sectors but a new wave of crackdowns on the technology and education sectors hints of a sweeping new vision from the top that may be signalling investors to back off from investing in Chinese companies.

Future Wealth’s View

The cardinal rule of all Chinese companies was –  to be successful as a corporation, they had to align with the Communist Party’s priorities. More recently, companies are realizing that finding common ground is increasingly hard to do. With Xi having proclaimed himself leader of China for life and there is little doubt that he will be deposed from that position, he appears to have embarked on a journey to rewrite history and become the most powerful Chinese Communist Party leader ever, even surpassing Mao Zedong. 

His priorities are national security, common prosperity and stability. The two of the three priorities – common prosperity and stability,  imply that the government is not going to allow high profile IPOs to generate billionaires out of the stock market and will definitely not allow their high profile technology visionaries to speak against the Communist values. We had written, not too long ago, about Jack Ma’s ill timed speech that wiped out billions in a single day – Link is here

What investors always look for from companies is predictability. If the government begins interfering with a company’s business or their vision, the predictability goes away and the stock market quickly abandons that company. In China’s case, there are thousands of companies facing this uncertainty. We, at Future Wealth, who have always looked to Chinese companies as a good way to add diversification to our client’s portfolio, no longer believe they are worthy investments. The Chinese may have gotten away with spreading Covid and denying it, but there is no denying that Chinese stocks are no longer attractive to US investors.