Beijing Cracks Down on Alibaba Stock for Good Reason

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It’s a strange time to be invested in Chinese companies, even flagship firms like Alibaba (NYSE:BABA). On one hand, it’s the natural place to put your money. Despite the novel coronavirus originating in the country, Beijing got the pandemic under control, albeit through draconian measures. But on the other hand, Alibaba stock is on multiple crosshairs.

The Alibaba (BABA) logo featured outside of an office building with bushes in the background
Source: zhu difeng / Shutterstock.com

Most prominently, President Donald Trump signed a bill which calls for delisting foreign companies from American exchanges if they don’t comply with accounting transparency standards that the Securities and Exchange Commission imposes on public U.S. firms. Clearly, the language of the bill takes aim at BABA stock and other major Chinese companies, like NIO (NYSE:NIO) and XPeng (NYSE:XPEV).

Even more alarming if you’re levered heavily to China, the bill had strong bipartisan support. Therefore, even with the incoming administration of President-elect Joe Biden, there’s no guarantee that Alibaba stock won’t find itself in political hot waters.

Alibaba Stock’s Complicated Relationship with Beijing

BABA apparently managed to tee off its local regulators. As you know, China’s agencies took the extraordinary step of suspending the initial public offering of Ant Group, Alibaba’s affiliate company. Later, The Wall Street Journal reported that in a bid to salvage the situation, BABA co-founder Jack Ma offered to hand over parts of the financial technology firm to the Chinese government. The WSJ stated:

The offer, not previously reported, appeared a mea culpa of sorts from Mr. Ma as he found himself face to face with officials from China’s central bank and agencies overseeing securities, banking and insurance. The Nov. 2 meeting took place a few days before Ant was supposed to go public, in what would have been the world’s biggest initial public offering.

Mr. Ma had angered Beijing by lashing out in a speech in October at President Xi Jinping’s signature campaign to control financial risks, saying it stifled innovation. Now, the regulators had called the meeting to voice their concerns about Ant’s business model.

His olive-branch offer at the meeting failed at saving the IPO and Beijing has since stepped up efforts to rein in China’s Big Tech giants.

With everyone eyeballing Alibaba stock, how should investors approach shares of the Chinese flagship?

Ant Problem

Although President Trump’s caustic approach to China may come off as belligerent, perhaps even xenophobic, I will defend his general foreign policy, or at least the spirit of it. The only way to deal with bullies is to punch them in the mouth.

Believe me, this appealing to dictators with favors and other garbage is simply that, garbage. In this case, you want a bully to deal with a bully, and there’s no bigger one than Donald J. Trump.

Further, it’s not as if we don’t have evidence of Chinese malfeasance. All you have to do is look at Luckin Coffee (OTCMKTS:LKNCY). Forget its recent explosion higher due to an SEC settlement. The overriding fact is this company flat-out lied to attract capital.

And the Chinese aren’t exactly happy about that either, which is a warning shot against Alibaba stock and its ilk. As academic research indicates, trust is a critical component of market participation. Further embarrassments like this will organically prevent China-based companies from attracting foreign capital, thus explaining Beijing’s harsh attitude to its own corporations.

But another component is that the Chinese government is worried about the influence of big tech firms like Alibaba and Tencent (OTCMKTS:TCEHY). Millions of people use their apps to make myriad transactions. However, as the WSJ notes, Beijing is leery about “the risks posed by their lightly regulated activities, such as online lending made popular by Mr. Ma’s Ant.”

Frankly, if I were a Chinese government official, I’d have every right to be concerned. Primarily, Ant Financial rolled out a blockchain platform called OpenChain, “which lets small- to medium-sized businesses (SMBs) and developers harness its proprietary blockchain technologies.”

Theoretically, this enables Ant to offer cryptocurrency-based transactions on the platform, thereby accelerating a true open-source financial system. Of course, this will be a huge risk for the communist Chinese government, which has a thing about maintaining control.

Deflation Concerns Might Weigh on BABA Stock

As well, cryptocurrencies pose a deflationary concern to the Chinese government. While the second-largest economy in the world, China’s fiat currency doesn’t have the sway of the U.S. dollar or the euro. Internationally, major virtual currencies are becoming the money of choice.

That translates to a potentially lower rate of circulation for the Chinese yuan. And we might be seeing evidence of this. For instance, consumer inflation in China hit an 11-year low, which contradicts the rising valuation of China’s stock market.

China inflation rate vs. SSE Composite Index
Click to Enlarge
Source: Chart by Josh Enomoto

In fact, between October 2018 through December 2019, China’s inflation rate and the average point level of the Shanghai Stock Exchange shared a direct (albeit weak) correlation of 41%. Since January 2020, the correlation flipped to an inverse relationship of 58%.

Basically, Beijing is right to be worried as its economy looks good largely in terms of market speculation. But the fundamental reality of China’s everyday consumer economy pings deflation. This may not be a sustainable situation, which poses another concern for Alibaba stock.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/china-cracks-down-on-alibaba-stock/.

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