After covering the story behind the Chinese crackdown, a crackdown that has sent stocks in a variety of industries tumbling, time has come to analyze if there are some sectors who have benefited from it. If so, who are they? Why did they not suffer the same fate? Let’s dive in.
A small recap
The crackdown was motivated by the Communist Party's desire to close China's wealth gap and keep capital expansion under line which led to a sell-off in sectors ranging from education to tech. Indeed, after-class tutoring was considered by the government as risky as it threatened to further deepen the inequalities between social classes. The reform also aimed to boost China's attempts to avoid a future demographic problem by lowering the cost of child rearing. The country is facing a plunging birth rate which they have every right to fight.
Concerning the tech industry, the headlines were all about the news of companies facing probes around data privacy, potential anti-competitive practices and so on and so forth. Fines after fines, tech companies were brought to heel by regulators and their prospects were unsure and still are, which translates into the industry’s volatility seen in these past few weeks.
Who are the losers? Why?
Obviously, the education tech sector was particularly hard hit by the crackdown as China banned companies from making profits, raising capital, or going public, decimating a $100 billion industry. TAL Education Group, a leading after school tutoring provider saw its share price collapse from $20 to around $5, and since then, has not gone back up.
The Hang Seng Tech Index dropped after China’s market regulator issued new upcoming rules on unfair competition. Alibaba Group Holding Ltd. and Tencent Holdings Ltd, two of the leaders took part in the dragging of the benchmark index. Tencent experienced its worst quarter in a decade, with a 19% loss after being rejected a merger with game-streaming firms and being forced to give up music rights. Shares of the e-commerce leader Alibaba, fell 13.9%, after being fined for anti-competitive practices. Both stocks have not managed to recover since.
The food industry was also hit as the giant Meituan fell 14%, its biggest decline on record. Once again, new guidelines coming from the government led to that decline. Indeed, food platforms were required to ensure the welfare of delivery prospects, by stopping the use of harsh performance algorithms evaluations, giving access to social insurance programs, which raises the operating costs, thus cutting into profits. The stock has also not recovered to its previous levels since then.
Pharmaceutical businesses and online medical service providers have also seen their stock prices plummet due to concerns about narrowing profit margins. Indeed, the health sector was believed to be facing regulatory risks as it presented wealth-and-services gaps between social classes due to ever-rising prices, which the government was particularly targeting. However, pharmaceutical businesses have one thing going for them into the future in the government allowing this sector to IPO in the US. Other user data heavy stocks will not be able to IPO in the US going forward...
Figure 1: Chinese crackdown effect
Are there winners?
Every story has a silver lining. Semiconductors and renewable energy, which are viewed as critical for boosting the country's desire to become a self-reliant manufacturing behemoth and achieving carbon-neutral goals, are among the winners.
The Chinese government supports industries that help the country meet its green goals, and one of them is the electric vehicles sector. According to Xpeng's president, the Chinese electric vehicle manufacturer is on the "right side of the law." Indeed, the company contributes to the growth of manufacturing, smart technology, and the carbon neutral agenda, which the government supports. The stock’s price plummeted when the crackdown happened but has managed to recover to its previous levels nearly fully since then.
While Hong Kong's Hang Seng Tech Index has lost 25% this year, Shanghai's Star 50 Index, which is heavy in semiconductor, renewable energy, and high-end manufacturing companies, has gained 7.5%. The gap demonstrates how investors are increasingly favoring hardware technology, such as chip innovation, electric vehicles, and high-end manufacturing, over software technology, which is perceived as increasingly geared towards marketing and fund-raising. As a result, Shanghai Bright Power Semiconductor Co. has increased by 162% this year, while Trina Solar Co. has increased by around 130%.
Figure 2: Bright Power Semiconductor Co. vs Trina Solar Co.
Health is also at the forefront of the government’s priorities, and it translated well during the crackdown as some companies benefitted from it. It turns out that, shares of the sneaker maker and other sports companies jumped, which was driven by policies for a healthier way of living. Li Ning Co. surged 5.7% while Anta Sports Products Ltd. rose 4.7%. However, the latter has reached a low point (even lower than during the crackdown) as of time of writing.
Overall, there is always a winner when there is a loser, especially when investing, as stocks are correlated either positively or negatively. New regulations are still coming along in China and continue to increase market volatility, leading to uncertainty for several sectors. Uncertainty often translates into a negative sentiment for investors thus explaining the big sell-off seen... However, it also often means that there are opportunities elsewhere.