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Chinese stocks have been getting crushed.
But don’t say I didn’t warn you; I’ve be saying for years - including this video in July 2022 - that the risks far outweigh the rewards when investing in China.
US-listed Chinese stocks are down -27% since posting that video. That’s compared to a +16% gain for the S&P 500.
But after such a brutal run for Chinese stocks, many are asking if it’s time to buy the dip.
And I’ll answer that question today.
Things Are Getting Worse in China
Chinese stocks have been one of the worst performing sectors over the last decade.
Even Alibaba (BABA) – the “Amazon of China” – has delivered a mere 2% return since going public nearly a decade ago:
Part of the reason for this underperformance is the sluggish Chinese economy.
For instance, one of their largest property developers filed for bankruptcy last week…
...and Chinese citizens are in even worse shape. In fact, over 20% of Chinese young people are out of work:
And unfortunately, this trend is going to get worse before it gets better due to one thing: demographics.
The Chinese Demographic Bomb
China has some of the weakest demographics in the world due to their One Child Policy.
The country now has one of the fastest aging populations in the world. And without young people to work and pay into their system, it will likely crumble under its own weight.
This is a key reason Chinese stocks have underperformed so dramatically over the last five years:
Clearly, the Chinese economy is currently in bad shape. But as investing legend Stanley Druckenmiller says:
“Never, ever invest in the present. It doesn’t matter what a company's earning, what they have earned." - Stanley Druckenmiller
Stocks discount the future. And for now, it seems Chinese stocks have priced in the worst.
But if you plan to “buy the dip” on Chinese tech stocks, you need a brief history lesson.
The Great Chinese Tech Crackdown
A crackdown on Chinese tech companies started back in November 2020 when Alibaba founder Jack Ma criticized the Chinese Communist Party (CCP) at an event in Shanghai.
Here's what the Chinese government did to Jack Ma afterwards:
Canceled the Ant Group IPO (which would've been the world's largest)
Levied a multi-billion fine against Alibaba
Removed Alibaba's app from the country's app store
But it didn’t end there; the Chinese government soon went after the “Uber of China” Didi Global (DID) days after the stock was listed on US exchanges.
The CCP then set its sights on Tencent Holdings (TCHEY), the country’s largest social media platform. Fines against Baidu (BIDU) and other consumer tech companies came soon after.
Some have compared this crackdown to the one in the US where politicians have tried to curb the political influence of Facebook Inc. (FB) and Alphabet (GOOGL). But that is a false equivalency, as the Chinese are ultimately crushing these industries rather than reforming them.
And when you realize why the Chinese are doing this, it makes much more sense.
Xi Jinping Doesn’t Care About Your Favorite App
It’s been clear from the beginning that the Chinese are only cracking down on certain types of companies.
For instance, China has never cracked down on any “hard tech” technology sectors. That includes industries like telecommunications, semiconductors, and artificial intelligence.
Instead, it’s the consumer-facing tech – like social media, e-commerce, and gaming – being intentionally destroyed by the Chinese government.
It’s clear the Chinese government believe these “soft tech” companies are unnecessary. In fact, they may even be a net negative for society. Xi Jinping stated this in a speech last year when he said:
“We must recognize the fundamental importance of the real economy… and never deindustrialize.” - Xi Jinping
Xi Jinping and the Chinese government crave geopolitical and military power. And you need a strong industrial base to make that a reality. That includes strong telecommunication, semiconductor, and artificial intelligence industries.
So it’s no surprise shares of China’s largest semiconductor shares surge as the crackdown on “soft tech” intensified:
Because if you want to win a conflict with the US and Japan, those industries – as opposed to social media, e-commerce, and gaming – will help you achieve those goals.
The Only Chinese Stocks I’d Buy
Here is a quote from Bloomberg opinion columnist Noah Smith on the shift in China's investing landscape:
If you’re going to fight a cold war or a hot war against the U.S. or Japan or India or whoever, you need a bunch of military hardware. That means you need materials, engines, fuel, engineering and design, and so on. You also need chips to run that hardware, because military tech is increasingly software-driven. And of course you need firmware as well. You’ll also need surveillance capability, for keeping an eye on your opponents, for any attempts you make to destabilize them, and for maintaining social control in case they try to destabilize you.
China's government is telling you any stock that serves the country’s industrial and geopolitical ambitions should do well.
That includes semiconductor companies like US-listed Canaan Inc. (CAN) and in addition to Hong Kong-listed smartphone maker Xiaomi (XIACY).
But in reality, you’re assuming an incredible amount of risk buying any Chinese stocks. Even Charlie Munger - the righthand man of Warren Buffett - abandoned his massive position in Alibaba last year.
That’s in addition to noted China bull Ray Dalio’s Bridgewater Associates, which holds only about 1% in the flagship fund.
For me, I’m going to keep doing what I’ve done my entire career: staying the hell away from Chinese stocks.
But if you can’t resist, stick to “hard tech” Chinese stocks.
Stay safe out there,
Robert