While some investors have grown wary of China, others have doubled down

While some investors have grown wary of China, others have doubled down
FILE PHOTO: A man walks past an Ant Group logo at the World Artificial Intelligence Conference (WAIC) in Shanghai, China July 8, 2021. REUTERS/Yilei Sun
“Expanding consumer market, rapid increase in entrepreneurial spaces, and affordable labor costs make the East Asian country a favorable destination for startups in the long-run,” says Bose of GlobalData.

Why have investors grown wary of Chinese companies?

  • China was previously a longtime favorite among investors, representing massive potential because of the country’s huge population, economic growth and innovation.
  • But after a series of regulatory crackdowns against domestic companies across various industries, investors have been more nervous about putting their money into China.
  • SoftBank Group, for example, halted investments into China in August of this year, with Chairman and Chief Executive Officer Masayoshi Son saying, “We are not against or for the Chinese government, and we don’t have any doubt about future potential of China. But again, new rules and new regulations are beginning to be implemented, so until things get settled, we want to wait and see.”
  • This nervous energy also comes after several other situations, such as Ant Group’s failed US$30 billion initial public offering (IPO) plans and, more recently, when Chinese ride-sharing company Didi Chuxing Technology Co., or just Didi, went public in New York but was hit with an investigation by Beijing authorities days after.

Wait, what happened to Didi?

  • So Didi’s blockbuster IPO under six months ago, was the second-biggest in the US by a company based in China after Alibaba Group Holding Ltd. And, while Didi’s opening day on the market went relatively smoothly, the following days did not go so well.
  • Just two days after the launch day, China announced that they were suspending the company from registering new users on the application.
  • China put the suspension in place “to prevent the expansion of risk” during a “cybersecurity review” into the company, according to a statement from the country’s cyberspace administration.
  • Two days later, the Cyberspace Administration of China (CAC) banned all of the company’s apps from app stores and said, “Didi Chuxing app is found to have severely violated the laws by illegally collecting and using personal information.”
  • It called on Didi to fix the issue with its app and comply with the country’s laws and ensure its customers’ safety.

Were there any other concerns?

  • Beijing ordered the company to delist from the United States in order to prevent any unsanctioned US audits into the company which holds valuable and private data of Chinese users.
  • At the same time, Beijing also introduced a bunch of new guidelines to further restrict the company in order to protect the millions of mostly contract workers that power the gig economy.
  • Since Didi’s ban, the company’s stock has dropped 41% and, because Uber invested in Didi, the company reportedly saw a US$2.5 billion loss.
  • Didi has since made promises to fix any issues regarding data collection and is still working toward meeting the Chinese government’s standards, including removing itself from US markets.

And, people are still investing in Chinese startups?

  • So, according to GlobalData, investors have been going pretty steady in Chinese investments this year.
  • Research provided by GlobalData’s Financial Deals Database reveals that a total of 3,340 venture capitalist funding deals were announced in China during the first 10 months of 2021, raising US$80.6 billion during that time.
  • “While (venture capital) funding activity across several key global markets remained subdued during October, China was among the very few markets to defy the global trend,” said Aurojyoti Bose, Lead Analyst at GlobalData. “October witnessed growth in VC funding value in China after a decline in September despite a decline in deal volume.”

What do some experts think?

  • Since this has all happened in China, there’s been a lot more focus and attention on Indian startups, with many saying that because China started its regulatory campaign, that money is being injected into the Indian startup scene instead.
  • But investment companies such as BlackRock Inc. have stated that they believe China to be more valuable than Indian investments.
  • Tom Masi, a New York-based portfolio manager with GW&K Investment Management LLC, recently trimmed his India positions shortly after BlackRock changed its position on Chinese stocks.
  • “There is more opportunity to allocate to China as the performance disparity between the two countries is one of the largest on record,” said Masi.
  • Barron’s recently posted some “Letters to the Editor” in response to an article about Chinese investments where one user indicated that China is making some moves that the US should consider following.
  • “China is doing what the U.S. should be doing, i.e., focusing on benefiting the standards of living of working people. The obscene wealth disparity we have is also a problem in China,” says Mark Labato. “‘Common prosperity’ is the cornerstone of a new approach in China, while we’re still suffering the Reagan-era ‘greedy is good’ avarice that results in a billionaires’ space race and unaffordable housing.”

What’s next?

  • The one thing that can be said is that while the regulatory crackdown has made some investors nervous, some still remain confident in the market.
  • “Expanding consumer market, rapid increase in entrepreneurial spaces, and affordable labor costs make the East Asian country a favorable destination for startups in the long-run,” says Bose of GlobalData.

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