China is an interesting place. From the outside (and in reality) the communist country has made huge strides in the direction of capitalism over the past 10 years or so. The move, like all aspects of business (and culture and, well, everything), has been orchestrated by none other than the Chinese Communist Party (CCP).
China listed its first options contract in 2016—which Johnnycat and I played a small role in helping to get off the ground. Options being pure risk transfer can be argued to be the most capitalistic thing ever created (and the best and most honorable part of capitalism, as options truly level the playing field between the financial titans and small retail 1-lot traders).
The CCP also grew some humongous corporations—or more accurately, allowed business leaders free reign to grow them. This resulted in some fantastically wealthy people.
Jack Ma and Alibaba
Take Jack Ma, for instance. His arguably biggest accomplishment was being co-founder of Alibaba Group. As of October 2021, he has a net worth of $42.3 billion.
Mr. Ma is a member of the CCP. One could argue (and probably no one could argue against) the idea that the CCP made him the wealthy billionaire he is today.
But…
Following some comments he made at a financial markets forum, in which he criticized China’s regulators and banks, Jack Ma… disappeared… for a few months from October 2020 to January 2021. To this day, no one knows where he was or why he disappeared from public view.
That period also coincided with a regulatory crackdown on his businesses.
China’s Regulatory Crackdowns
Since then, there have been even more regulatory crackdowns on Chinese businesses and the wealthy tycoons who lead them.
In 2021 we’ve seen massive crackdowns in Chinese tech, financial and real estate firms. Firms like Tencent, Didi, Ant and Meituan—just to name a few—were highly scrutinized and fined as a result of new antitrust laws.
Note, in China laws can be made retroactive. So… There’s that.
The highly leveraged Chinese real estate behemoth Evergrande began running into some debt trouble (to put it mildly) in September. They eventually defaulted on some of their debt for the first time this past Monday. Solution: The People’s Bank of China Governor said Evergrande’s inability to meet its obligations will be “dealt with in a market oriented way.” So… No bailout. Oh, and there’s been one more solution… To have the founder and chairman pay off the debts from his own pocket. He’s used over $1 billion of his own money to pay the corporation’s debt thus far.
CCP Leaders
If there was ever any question about who the boss is in China… Well, that would be a silly question. It’s the CCP.
Many of the companies’ stocks sold off huge as a result of the scrutiny, fines and forced restructurings the party has levied recently. Some stocks like Tencent (TME) and Weibo (WB) are trading at multi-year lows. That’s bad for investors, really bad for the companies’ management and, well, bad for China. So…
Despite the fact there are no bailouts coming, you can be sure China is working to contain the damage. Though the fall in Chinese stocks was, at least somewhat, the result of government showing wealthy business people who’s in charge, they don’t want their market in the toilet either. I imagine they just think of it as a little bloodletting. I see no other possible transmutation than the CCP organizing a market recovery. And I’m not alone.
One sign such a move is already under way is that this past Monday China’s central bank said it would cut the amount of cash banks must hold in reserve, its second such move this year, releasing 1.2 trillion yuan ($188 billion) in long-term liquidity. And they said they’d cut the reserve requirement ratio for banks by 50 basis points.
Playing the Chinese Recovery
So, what’s the play?
It’s a little tricky. DIDI has said it plans to delist from the NYSE, which dragged it and other Chinese tech stocks down. WB shares started trading in Hong Kong last week and dropped quite a bit in their debut. And all this as the U.S. plans to step up regulatory scrutiny over financial disclosures.
It’s speculative. But I have personally dabbled in some small long delta positions in TME. TME hit an all-time low last week but has bounced a bit higher since.
The TME trade consists of owning the Jan21 15 calls. They’re cheap. It’s more a lottery ticket trade. I’m OK losing what I paid, but if the stock recovers it can pay off big.
Delisting Chinese Stocks
Finding good China rebound plays is all further complicated by the possibility of these stocks and other Chinese stocks voluntarily or involuntarily being delisted from U.S. exchanges. This, by the way, is why there are some Chinese stocks currently listed as ADRs on U.S. exchanges now listing themselves on the Hong Kong exchange. It provides a secondary listing outside China (Mainland China, for those who want to split hairs) but outside the U.S. …Just in case.
I’m watching DIDI and looking for an options play there. It requires more research. Keep an eye in the MTM Community Chatroom under the #tradeideas channel for updates. And don’t be shy about posting a trade you’re looking at there as well. We’re stronger as a Community.
Dan Passarelli
Founder and President
Market Taker Mentoring, Inc.
