Why I Won’t Buy Chinese Stocks Like Tencent & Alibaba

IMPORTANT: Please read the disclaimer before continuing.

I want to share why I would think long and hard before entering a position in a Chinese-listed company.

Last November, the world read about how Ant Group’s IPO in the Hong Kong exchange was stopped. 

Ant Group is pretty much synonymous with Alipay, a ‘wallet’ that enables cashless payment. Pay bus or taxi fares, buy air tickets, shop online, dine in restaurants with Alipay. The app even lets people invest, or take out personal micro loans. It’s similar to payment app Square (in the US). 

So why did the Chinese government stop Ant Group’s IPO? It all started when Jack Ma, who controls the majority of Ant Group, criticized the government’s tight control on financial risk. 

Mr Ma said that the government focused only on risks and overlooked development, which hurts entrepreneurs. His comments angered the government, and the Chinese president personally halted Ant Group’s IPO. 

The Chinese government also asked Ant Group to focus on its payments business, rather than on its lending business.

1. The Rule Of Law Doesn’t Really Protect Businesses 

This is the first reason I am uncomfortable investing in Chinese companies. It feels like in China, if the Chinese government wants you to follow a certain direction, you are expected to do so.

Don’t get me wrong. I am not saying the Chinese government is right or wrong for halting Ant Group’s IPO – they could have legitimate reasons. Wouldn’t it be more transparent for this debate to take place in court, so the company involved has its chance to state their case? 

I feel that creativity is sacrificed in an environment of high control. My concern as a shareholder of a Chinese company is: can its CEO, founders, or leaders be creative in such a highly regulated environment? Would they be expected to follow the direction decided by the government?

For me, innovation and disruptive technology emerge when people think beyond the mainstream, and dare to challenge norms. 

Let me share why I have more confidence investing in US companies… here’s a quick story. 

It’s widely known that in 2018, Trump repeatedly accused Amazon of evading taxes and putting small businesses out of business.

He even urged US Postmaster General Megan Brennan to double service rates for Amazon to ship their packages.

Megan Brennan resisted, explaining that the rates are bound by contracts that must be reviewed by a regulatory commission.

Although Trump was President, he couldn’t use his position to override the rule of law. This law protects US companies and allows for business to be conducted in a fair manner. 

Even though accused of being a monopoly, Amazon followed the necessary procedures, and the US government could not just put a stop to an Amazon business segment, forcing the company to focus on other areas.

2. The Chinese government sent state officials to a hundred private firms including Alibaba.

This shows that the Chinese government exerts influence on private companies.

As a shareholder, I am concerned because a private company may be forced to allocate funds for “national service” on behalf of the nation – at the expense of shareholders.

For example, during the recent trade war, the US government banned China’s number two telecom equipment maker, ZTE Corporation, from buying US chips. This came as a significant blow as China hasn’t caught up in technology for their chips.

Immediately, Tencent’s Chairman Pony Ma pledged to advance China’s chip industry – an industry totally new to Tencent – something which, in my opinion, was not synergistic with the company direction, since Tencent draws its biggest revenues from gaming.

This comes as no surprise because Pony Ma is a member of the CPC party, and he’s also a member of the Chinese Parliament.

Doesn’t it feel like Tencent is doing national service for China at the expense of shareholders? Again, it’s not my intent to judge the political correctness of this, nor am I saying that it’s right or wrong for Pony Ma to do this. 

What is clear here is that if Chinese companies are asked to do “national service”, they would be expected to comply. 

As investors, we need to accept that these are the rules of the game if we choose to invest in Chinese companies. 

Here’s a quote from Einstein. 

With investing, certainty is a big deal. I choose to stick with what I know. There are so many companies in the US market growing 40 % or more year on year. I doubt I’d be missing much if I didn’t invest in Chinese companies. No need for FOMO! 

Let me state for the record that I am not anti-China. Hey, I’m Chinese myself! I am not asking people not to buy Chinese stocks. My intent is to remind people of the importance of knowing and understanding the risks before taking a position. 

As always, the most important thing to do before making a trade is to study and research the company thoroughly. If you have done so, and are confident, that’s what matters.

Remember – Always Invest Safe! Study the facts and make your own decisions. Say no to lousy companies – only buy the best growth companies in the world.