3 Sep 2021, 11:10

The number one rule of investing has always been buy low and sell high. While most global stocks have been registering strong performances in 2021, only China stocks have been bucking the trend. While the S&P 500 has went up by 20%, the MSCI China index has fallen 20% instead. Therefore, is it a good time to buy China stocks since their prices are very undervalued now?

As we all know, the main reason for the steep drop in Chinese stocks was due to the crackdown in Chinese companies by the government. President Xi Jinping’s goal is to achieve “common prosperity for all”. This is going back to the roots of the Chinese Communist Party (CCP) to fight for the welfare of the common people. Speaking plainly, their objective is to spread the wealth to the larger section of the population. In capitalist Western nation, 90% of the wealth is owned by 10% of the people. In China, they want 90% of the wealth to be spread among 90% of the people. Therefore, in time to come, China’s middle class would keep growing stronger and more prosperous.

In the CCP’s view, in order to prevent themselves from falling into the trap of many capitalistic countries, this means reining in companies to serve the larger interest of the society. For example, getting tough in terms of curbing bad lending practices (Ant Finance) controlling the spiraling cost of properties and medicines. All these, without doubt, would benefit the middle class. However, is it in the interest of investors to do so? How will it affect the investing environment in China?

If you were a short-term investor, you would have lost faith in the country’s stocks. As Chinese stocks got hammered daily, you would have lost confidence in the ability to recover. In fact, we actually made some profits by short-selling Baidu (see example above) when the stock crashed.

However, what most investors do not know is that the CCP is sacrificing short-term pains for long-term gains. Just imaging and large, confident and rich middle class being unleashed and ready to spend their new-found riches. This will reinvigorate the economy after Covid-19 is over. And for a sustained period of time.

One of the CCP’s economic aims was to shift from an export-oriented economy to a consumption-based economy like the US. While the US is able to support its consumption habits by excessive money-printing, China is not able to do that. This is because the USD is the reserve currency. There is high demand for USD overseas. Therefore, as more Americans spend on goods and services from foreign sources, they can pay them in USD. China, on the other hand, does not have this luxury currently. Therefore, it needs to build up its strong middle-class core that has the ability to spend so that they can generate strong economic growth. Failure to do so, it would inhibit China’s global ambitions as its people would suffer the fate of the low-middle classes of America, homeless and reliant on welfare benefits.

While the long-term prospects still look bright on China stocks, however, the bottoming out of stocks prices may not be over. I doubt that the CCP’s crackdown is over. There are certain sectors of the economy it is still targeting. This exercise may even spill over to 2022. Certain sectors are certainly vulnerable like the consumer technology industry. However, there are some segments which they may not touch. These are the new sectors of growth which the CCP is championing. They include tech hardware, green technology and AI. Increasingly, China is shifting its focus from “soft” tech to “hard” tech as it aims to become a technology powerhouse. The CCP believes that supremacy in these sectors could give them an edge in the future. As for the companies been targeted in the current crackdown, I believe that, in time to come, they would also pivot their businesses to serve the interests of the CCP. This would enable them to recover and ride the new wave of middle-class consumption.

While this will take time to bear fruit, investors like you and I could watch out for opportunities to enter some China stocks since prices are low. However, while there are certainly some value stocks lying around, there is still a lack of momentum yet. This could mean that the crackdown is not over. Hence, one way to enter safely would be to read the charts and identify some bottoming out patterns before we take the leap and reinvest in these China stocks. While the short-term prospects still remain uncertain, but investing in the long-term could eventually pay off!

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