What The Chinese Tech Crackdown Means For Investors

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The Chinese government is undertaking an unprecedented crackdown on its tech sector, including companies listed on U.S. markets. The crackdown has already cost U.S. investors billions of dollars and could grow more expensive in the coming months.

As a result, the U.S. Securities and Exchange Commission (SEC) has halted all initial public offerings (IPOs) and other securities sales by Chinese companies until it writes a new risk disclosure for potential investors.

The crackdown has revealed the inherent regulatory risks associated with investing in a country with no real protections for private enterprise. (Story continues below.)

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IPO Crackdown And Didi Global

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Chinese companies raised a record of $12.8 billion from U.S. investors in 2021, as tech companies scrambled to get listed before the new, more stringent regulations on foreign IPOs imposed by China take effect.

China is restricting IPOs from companies that control large quantities of user data. Authorities are concerned that foreign investment will give those foreigner investors access to Chinese peoples’ data.

Keep in mind, the CCP itself uses mass surveillance to maintain its control over its population.

Didi Global was one of the companies that scrambled to get listed before new regulations take place, ignoring explicit warnings from authorities.

Days after the $4.4 billion IPO, Didi was taken off Chinese app stores, which crippled the company. Didi is considering going private again in order to placate authorities and compensate investors.

Is Investing In China Worth It?  

The Chinese crackdown prompted a great selloff in the Chinese tech industry. With many investors now panic selling, now may be a particularly good time to invest in companies with good business models.

Based on 2022 expected earnings-per-share, Alibaba is currently trading at a price-to-earnings ratio of 16. That is very favorable for high-growth tech stocks.

However, investors have to be cautious. Alibaba could face some of the same regulatory risks as Didi, as its app collects even more data.

The draconian crackdown is not just indicative of the government problem with certain industries such as education technology and user data collection (or crypto exchanges and mining). Rather, it demonstrates the inherent risks of investing in an authoritarian country.

Investors have no guarantees that the government won’t decide to shut down the company they invest in.

This concern was confirmed after China threatened to crack down on the online gaming industry.

Investors that still try to invest in China will have to be armed with high risk tolerance and a deeper understanding of China.

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