Risks associated with investing in Chinese public companies

There are about 250 Chinese issuers listed on the US stock markets with a market capitalization of US $ 2.1 trillion, and only in 2020 and 2021 have 30 and 34 issuers been listed respectively.

While these issuers are from different sectors from financial to technology, they have strong fundamentals and positive prospects.

For example, in the insurance industry, better management and zero tolerance for the pandemic in China generated higher profits for these companies due to less mobility and, therefore, claims.

In the same way, the sectors with the greatest development are the internet, electronic commerce and electric vehicles. In e-commerce alone, online sales operations reported by the statistical census bureau of China account for about 30% of all commerce sales, compared to 14-15% in the United States.

However, there is also a slowdown and valuations have been hit by increased scrutiny by the Chinese government for antitrust practices, given the strong penetration of e-commerce.

For example, Alibaba Group whose gross volume of merchandise sold (GMV) exceeded 1.2 trillion dollars (millions of millions, or trillions) even with a sharp slowdown, sales grew 29% YoY in the last quarter.

Additionally, there is the risk of delisting issuers from the US stock markets that do not comply with accounting regulations in that country. However, the China Securities Authority (CRSC), an authority similar to the SEC in the United States, considered information security and national security risks to share such information.

The case of DIDI was exemplary in the matter: It represented the largest initial public offering in 2021 with a market capitalization greater than 80,000 million dollars and currently it is less than 30,000 million dollars. The Chinese government initiated a review procedure of the information security of the App in China and required to download the App from the market indefinitely. DIDI, when weighing risks and benefits, preferred to announce the delisting in the New York market.

Although there is a high degree of uncertainty and there is the possibility of a reconciliation between the authorities of both countries, the likely scenario is an increase in regulation and future delisting of the US stock markets.

This entails a double risk: political risk that is difficult to quantify and predict and therefore an investor should avoid and a liquidity risk that implies the practical difficulty of exiting the investment.

Chinese issuers would have to be listed in Hong Kong, which is less stock market and also has hours of operation that are not simultaneous with Western stock exchanges.

In this sense, individual investors are those who face the greatest risk, since index funds or ETFs can carry out the conversion process and minimize this liquidity risk.

Chinese broadcasters are in a growth stage and have strong growth prospects. An example is NIO, the Chinese TESLA that already has 5 models with technology that exceeds the models of its competitors and has growth in triple-digit vehicle deliveries, expansion in margins and its price mix remains high but competitive in addition to already starts operations in Europe, particularly in Norway.

However, it is only listed in the United States and is heavily undervalued. You would have to start the process to get listed in Hong Kong or Shanghai.

For this reason, we recommend that Mexican investors in Chinese issuers make a shift towards eastern indexed funds with less weight in the technology and internet sector and a greater presence in other sectors such as renewable energy, financial and consumer affairs.


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