The Evergrande episode last week shows just how risky Chinese investments have become and yet how integral its marketplace is to the global economy. The news that the property developer had missed an $83 million interest payment sent shockwaves rippling around the world, sending the Dow Jones Industrial Average (^DJI +0.88%) tumbling some 900 points over several days.
While Beijing's reassurances that it can contain the crisis seems to have calmed the market's jitters -- the Dow has since regained all the ground lost -- the widespread corporate crackdown the government is carrying out against broad swaths of its economy does raise the valid question of whether China is a market worth investing in right now.
Image source: Getty Images.
Keep your head down
Capitalist businesses operating in a communist country have always faced a delicate balancing act. But as corporate influence grows amid a slowing Chinese economy, Beijing is exerting its control to remind companies exactly who wields control.
The early manifestations of this power play began in earnest last year when Alibaba (BABA +1.63%) founder Jack Ma had the temerity to criticize state regulators for stifling innovation. The response was swift.
Alibaba's Ant Financial had its scheduled IPO for the Shanghai and Hong Kong market put on hold and then withdrawn after regulators said there were "major problems" with the listing. Ma, who had been a popular public figure, suddenly went into hiding, raising concerns over his whereabouts.
Regulators also fined Alibaba 500,000 yuan, or about $76,500, for failing to seek regulatory approval before increasing its ownership interest in the department store chain Intime Retail Group.
Other tech crackdowns followed. A planned merger between Huya and Douyu International, which would have given Huya parent Tencent a dominant share of the livestream gaming market, also became the subject of tighter regulatory scrutiny. The merger was subsequently called off in July due to antitrust concerns.
Image source: Getty Images.
A spreading malaise
Intervention in the marketplace has only intensified as regulators have expanded their push to re-exert control.
- Online education and tutoring companies, including New Oriental Education & Technology and Gaotu Techedu, were banned from making profits. Regulators also limited foreign investment in their stocks.
- The Didi Chuxing ride-sharing app was kicked off all app stores in the country over alleged cybersecurity concerns, crushing parent Didi Global's stock.
- Chinese companies that had recently IPO'd on U.S. exchanges, like Full Truck Alliance, Kanzhun, and UP Fintech Holding, came under the magnifying glass, perhaps as a warning to other companies considering listing in the U.S.
- Trade ministers said China had "too many" electric car manufacturers and would begin the process of consolidating them.
- And most recently, Beijing banned all cryptocurrency transactions as a means to keep Chinese consumers from private financial-services providers as it works to develop its own digital currency.
While these far-reaching measures rightly cast a chill on enthusiasm for these stocks, investors should understand U.S.-based companies that are highly dependent upon China for goods, materials, and even revenue are at risk as well.
Image source: Getty Images.
Doing business in China is getting tougher
World-class integrated resort operators Las Vegas Sands, MGM Resorts, and Wynn Resorts have reeled from the impact of the coronavirus virus pandemic because Macao has largely been closed off to tourists and visitors.
Only recently have people begun to return to the only place in Greater China where it's legal to gamble. But monthly gaming revenue remains anemic, and now the licenses they hold, called concessions, are undergoing a renewal process that may see the length of the license-holding period cut in half even as the market opens up to more domestic operators.
Sands, Wynn, and Melco Resorts & Entertainment are especially susceptible to any changes regulators might make in the concessions because they derive two-thirds or more of their revenue and profits from Macao. And Sands recently sold the last of its U.S. properties to go all-in on Asian gambling markets.
MGM Resorts is the casino with the most insulation from these changes because it still makes most of its money here in the U.S.
A risky venture
As tensions between the U.S. and China continue to rise, and Beijing tests the boundaries of its influence in foreign markets, American companies may find themselves caught in the pincers of foreign policy objectives.
For investors, China may become a market too uncertain and dangerous in which to cast too wide of a net for stocks. Although companies like search giant Baidu or e-commerce giant JD.com seem to remain in the good graces of Beijing, it becomes a challenge figuring out which business might be the next one to step on a landmine.
I wouldn't say China is an investment no-go zone just yet, but this market is already appropriate only for investors with a generous appetite for risk. And even then, greater care needs to be taken; China-bound risk-takers are advised to invest only in those companies with the most solid standing.
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