The “Chinese crackdown” on Alibaba (NYSE:BABA) stock and other big tech stocks has chilled Wall Street, but U.S. audiences (including investors) have been trained over the decades to read the headlines and dispense with the details.
That’s why our digital media and social media love clickbait headlines.
It’s the sensation of news, not the actual acquisition of information that drives us from one headline to the next.
So no, for those of you already itching to move on to the next hot tip, what’s happening in China isn’t the destruction of its biggest geese laying big golden eggs for the No. 2 economy in the world. You can go now.
For those of you who are left, here’s the rest of the story about BABA stock and others.
The State Isn’t Interested Tech Billionaires
The Chinese government isn’t exactly a rough and tumble democracy. It’s centrally controlled and speaks as one voice when it speaks. That may get a bit mumbled once orders get down to state and local level, but you don’t want to cross the state.
President Xi Jinping just made a statement that he wants to “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society.”
The government doesn’t want these tech billionaires dominating the economy to the point where they can hold the government hostage.
Before the dotcom bust, there was an apocryphal story about how when U.S. lobbyists saw the rise in Silicon Valley tech, they visited the big players and asked why they hadn’t spent a lot of money lobbying Washington.
The tech players didn’t think spending on politicians was a good use of money, but when lobbyists told them how much it cost to “buy” a House member or Senator, the tech execs were stunned – it was a bargain.
And that’s how the country has created massive tech companies that continue to assert increasing control over U.S. tech policy.
China’s leaders aren’t interested in going down that road. They want to assert now that the party runs the government, not the companies.
Another part of the effort is to reframe the U.S. markets. The Chinese want to make Shanghai the Wall Street of the 21st century and they can’t do that if all the big Chinese firms see Wall Street as the sine qua non of financial markets.
Part of what’s happening with BABA stock is that they’re starting to buy back significant amounts of their U.S. shares. That lowers the number of investors in U.S.-listed BABA stock.
Also bear in mind that BABA stock’s ADR doesn’t exactly represent the same company that exists in China. It’s a shell company with various assets that represent BABA stock.
Other Chinese ADRs are set up the same way, and U.S. regulators are coming after them. This isn’t too different than when European stocks delisted from U.S. exchanges because regulators wanted European firms to conform to U.S. account regs, which would have meant entire accounting teams dedicated to their U.S. listing.
BABA Stock Remains Strong
So this whole thing is bigger than just a crackdown on tech stocks. It’s about how the Chinese are managing their tech boom and trying to keep the marketplace more competitive, hedging its exposure to U.S. markets and keeping money less a threat to governing authority.
BABA stock remains a good buy for the long term and a better value now that all the scared money has left. The stock is off 25% year to date, but its revenue continues to grow briskly and it’s making significant efforts to expand its cloud computing business.
There will certainly be heated exchanges between the U.S. and China but that won’t change the fact that both countries are focused on building value in their markets.
BABA stock is a good buy for long-term investors that understand the value of – and sometimes the volatility of – having positions in quality companies of the chief economic rival of the U.S.
On the date of publication, GS Early did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
GS Early has been an award-winning financial writer and editor for nearly three decades, working with many of the leading financial editors and publishers during that time. He’s seen a few things and heard plenty.