Thread by @MnkeDaniel

Chinese Regulation is all over the news recently.

I tried to sum up what happened in the last weeks and assess what has changed.

👇🏼

(1/3) Delistings of Chinese Firms

Let's start with the biggest concern.

The possibility of delistings.

Since the $DIDI situation in July, investors fear the possibility that Chinese stocks will vanish from U.S. markets.

At the end of July, the Chinese government surprised investors by considering a penalty for $DIDI.

Didi seemingly IPOed in the U.S against the recommendation of the Chinese government.

After China threatened with penalties, Didi’s stock plunged and lost over 50%.

Especially concerning was the timing by the CCP.

They did not stop the IPO from happening.

Instead, they let foreign investors put their money into the stock and afterward made it plunge.

That's an important point. We'll come back to this later.

For now, let's talk about the likelihood of delistings from China's perspective.

In my opinion, the chance is very low.

Here's why!

First and foremost, Chinese companies would lose hundreds of billions of dollars.

This cannot be the goal of the CCP.

Even if they don't care about valuations, but rather the value the company provides for China's citizens.

Outside capital is crucial.

Why?

China is currently competing with the U.S for the ‘number one spot’ in the world.

In this race, outside capital is not only valuable financially.

It also starts a relationship with western societies.

Capital coming from the U.S and Europe is another step towards a more global china.

In the long run, Chinese firms must become global to stay competitive.

And they already try.

Whoever watched the European Championship was bombarded with Chinese ads.

On and off the pitch.

The CSRC (China Security Regulatory Commission) also stated the importance of foreign capital.

But some things are more important to the CCP than foreign capital.

Keyword: Data

Sensitive Data > Foreign Capital

The CCP made clear that there won't be any (international) IPO’s of companies that work with sensitive Chinese data.

But I don't think China is the only country that wants to keep its data save...

This regulation should not affect $BABA, $THECY, $JD, or any other big tech company already listed in the U.S.

(and doesn't store sensitive data)

For all of these reasons, I would assess delistings coming from China as very unlikely.

Especially in big tech.

But what about the U.S?

The $DIDI fiasco did raise questions.

We earlier talked about the timing of the CCP in the Didi case.

Many international investors lost a lot of money because of this.

Maybe the U.S needs to protect American investors by delisting Chinese stocks?

If we see other scenarios like the Didi one, I would not be surprised if these arguments come up.

Remember that Trump already discussed delisting Chinese stocks before.

I believe this could become a situation in the future.

The incentives to keep Chinese stocks trading are smaller on the U.S side.

Yet, the U.S is known for its open markets, and thus, for now, this is not a risk but speculation.

Despite there's an easy way to avoid all of this risk.

Buy Hongkong shares.

Even if a delisting happens, your shares are still tradeable, and you'll get them at bargain prices.

Massive outflows, no changes in the business.

Enough about possible delistings.
Let's continue.

(2/3) Common Prosperity / Wealth Distribution

This month in August, Tencent announced a $15.4 billion “donation” to the Common Prosperity cause of the CCP.

The goal, broader wealth distribution and a wider middle class.

This was a shock to many investors.

15 billion dollars. Given away.

But let's start at the beginning.

A broader middle class, common prosperity, and less inequality, no government would say no to this.

The question is the how.

How do we get there?

Asking big companies in the country to donate billions is a way.

An uncommon one in western economies, but a fast one and one that was not that unexpected.

China is not the U.S.

China is a communist state, and although its economy often seems capitalistic, the core is not.

Being aware of that is something that I already mentioned on my last thread on $BABA.

Know where you invest.

However, before jumping to conclusions, let's take a closer look at this “donation.”

First, Tencent did not call this a donation or charity.

That's what western media called it.

It's also not money that the government will receive and have complete control of.

Tencent decides where it'll go.

$7.5 billion for “sustainable societal innovations” and

$7.5 billion for “co-prosperity” initiatives.

A lot of this money will go into the private sector.

Doesn't sound like a typical donation to me.

Nevertheless, other companies, such as $BABA or $JD, might have to join and announce similar actions.

So while it is not a donation to the CCP, it does not seem like a completely voluntary action either.

A short summary of this section:

• The ‘how’ is important when we talk about common prosperity.

• A broaderMiddle Class = More Customers

• Companies might have to do their part, but wealth redistribution will probably be more relevant to individuals than companies.

(3/3) Latest News on Algorithms

In the last couple of days, the Cyberspace Administration of China (CAC) released new rules regarding algorithms.

Customers of Alibaba, JD, and co now have the option to turn out specific personal recommendations, manage ad topics, etc.

This is the sort of regulation that is discussed in Europe all the time.

Consumer advocates demand such laws for years, and it's only a matter of time until laws will follow.

Since we're talking about laws...

Being able to opt-out personal recommendations was already required by law since 2019.

This is a pattern we often saw in the last weeks.

Up until now, Chinas tech landscape was heavily under-regulated.

Even when laws were in place, nobody cared.

This was one of the main reasons China started this wave of regulation in the first place.

Now, we've talked a lot about what has happened recently.

Here are my final thoughts:

A lot of regulation we've seen out of China was a consequence of under regulation.

I say “regulation we've seen” for a reason.

Most of the regulations that would actually harm the business models of $BABA, $THECY, $JD, and co did not come (for now).

They're speculation.

Now, there's undoubtedly a lot of uncertainty. And I don't think I know what will happen.

I have no idea.

I try to assess what has actually happened and if it affects the companies I mentioned here repeatedly.

Based on that assessment, I make my investment decisions.

You might have a completely different view. Feel free to tell me in the comments.

I love to hear your opinion, but stay respectful.

For some reason, this China topic is very emotionally loaded.

Let's make this comment section a place where we respectfully agree or disagree.

Finally, I've put a lot of work into this thread.

If you find it interesting, you would enormously help me by Retweeting or Liking

Thank you very much!

Also, a huuuge Thank You to
@ruima and @JoshuaTai0427 for sharing their thoughts with me.

@dengusa and @briefnorris also helped me through their content.

Check all these people out.
They make great content.

People who might also find this thread interesting:

@frankinvesting
@value_invest12
@BuyandHoldd
@daniel_toloko
@jablamsky