Chinese Tech Stocks Are Down 50%. What Now?

A reader's timely question... Regulatory crackdowns cause panic in China... Is this the time to buy?... A real-time example of why trailing stops work... More about Amazon's cryptocurrency plans...

A good question arrived in our inbox earlier this week...

Paid-up subscriber Martin M. wrote in, following our report on Monday about the contentious meeting between U.S. and Chinese officials regarding trade between the two countries...

Good discussion on the tensions with China Monday, but what about investments? It appears that Chinese stocks have entered a bear market. Should Chinese stocks be avoided altogether, or could this be a buying opportunity?

These are a few very good and very timely questions... and we have answers today.

But first, if you're not familiar with what Martin is referring to, it's that Chinese stocks – particularly technology stocks – have been cratering lately... in response to a slew of news surrounding increased government regulation of Chinese companies.

The Hang Seng TECH Index, which represents the largest 30 technology companies listed in Hong Kong, is down 14% in the last week and a whopping 41% since its most recent high on February 16. That puts the index around the same level it was in June 2020.

It's a worse story with the China Internet ETF (KWEB), which includes companies like Tencent (TCEHY), Alibaba (BABA), and JD.com (JD)...

KWEB is off more than 50% from its February high. Yesterday was its highest single-day volume in history on a big down day – perhaps a sign of a "sell everything" sentiment.

Here's a chart that our True Wealth Opportunities: China editors Steve Sjuggerud and Brian Tycangco shared in their latest monthly issue last week... It's of KWEB compared with the Invesco QQQ Trust (QQQ), a fund that tracks the Nasdaq 100 tech stocks in the U.S.

You'll see they've mostly risen in tandem, until this year...

The Chinese government having its hand in business is, of course, nothing new, but this latest sell-off has been sparked by an entirely new set of wide-reaching regulations against tech giants and stricter rules on overseas (read, U.S.) listings of China-based companies...

It has gotten to the point where tonight (in China), state regulators held a virtual meeting with several major international banks to urge calm... Why the panic?

With that question and reader Martin's question early on, I (Corey McLaughlin) will take a look at the Chinese markets right now – including insights about what this panic means for those who hold shares in these companies.

Things heated up earlier this month with news surrounding Chinese ride-sharing giant Didi Global (DIDI)...

We've written about China's crackdown on cryptos. But they're also tightening their grip on tech companies...

For example, Didi Global is a larger version of Uber (UBER). Earlier this month it went public on the New York Stock Exchange ("NYSE"), apparently without Chinese government approval. As our Stansberry NewsWire analyst Daniel Smoot wrote on July 22...

Bloomberg reported that Chinese authorities intend to dish out a series of punishments against DIDI over anticompetitive practices, cybersecurity concerns, and its choice to list in the U.S. without official approval from the Chinese government.

These punishments could include a fine greater than Alibaba's $2.8 billion from earlier in the year. Sources familiar with the matter added that it could lead to suspension of operations or being delisted from the NYSE.

That development came one week after seven Chinese government agencies visited the company's offices to conduct a cybersecurity review... and regulators ordered app stores to remove DIDI's main app – as well as 25 other apps the company owns – from their digital marketplaces. As Daniel reported...

This reaffirms that China is continuing to clamp down on its rapidly growing technology market to end monopolistic practices. However, it also reinforces the fact that tensions between the U.S. and China are heating up.

With the U.S. blacklisting and delisting Chinese companies due to national security concerns, China is beginning to tighten its control over companies – potentially halting future firms from listing overseas.

This certainly isn't an environment that's conducive for a company to make profits as it wishes. And we're not just talking about a couple of stocks that could be impacted here... There are roughly 250 Chinese companies listed on the NYSE.

Another notable regulatory crackdown happened over the weekend...

On Saturday, China's State Administration for Market Regulation said it would prevent Tencent Music Entertainment (TME) from pursuing exclusive music copyright deals... and fined the company for monopolistic practices following its purchases of China Music.

At this point, it's unclear where and when this regulation story will end. As Steve wrote in an update to True Wealth Systems subscribers yesterday...

Last week, Beijing announced that it was doing away with for-profit tutoring... a multibillion-dollar industry in China.

And on Monday, the country announced that it was barring Tencent's (TCEHY) WeChat app from adding new users for now. Tencent is one of China's original tech darlings, along with Alibaba (BABA).

These are just the latest examples...

All of this regulation is scaring investors.

With all this in mind, I asked Brian of our True Wealth Opportunities: China product for his take on the Chinese markets.

He told us True Wealth Opportunities: China subscribers should stay tuned for a comprehensive update from him and Steve on the entire situation, and what next steps to take, in light of the regulatory uncertainties in China...

In the meantime, Brian sent ahead some thoughts for Digest readers...

For starters, Brian said the changing regulatory landscape in China has caught investors off guard...

In many ways, China has already surpassed all other nations when it comes to the development of its tech industry after decades of almost no oversight. So it now finds itself in a unique position of being the first major economy to establish some hard and lasting ground rules covering tech.

Brian says that since the impact of regulatory changes are difficult to forecast with any degree of certainty, investors are now taking a worst-case-scenario approach. They're selling first and asking questions later... in other words, panicking.

But if you own shares of giant Chinese tech companies today, it would be a mistake to blindly follow suit (unless your stops have been hit), Brian says...

Stampeding out with the herd is usually a recipe for disastrous investment decisions.

He said sellers are overlooking the long-term promise of China's tech sector...

We do know that Beijing sees the technology sector as the main driver of China's economy in the foreseeable future. It also wants to push for digitalization of every part of its economy where possible, and it needs a thriving tech industry to achieve that.

The rollout of 5G on a scale that already dwarfs the rest of the world is expected to intensify this digital shift in China. They've already committed themselves into that direction.

That's why we believe that companies like Alibaba and Tencent aren't going anywhere. But they'll have more company and more competition due to the new regulations.

More competition should be seen as a positive for innovation and long-term development, Brian says, but that doesn't mean the selling is done. For that reason, he's not suggesting that this is a buying opportunity just yet...

Everyone should keep an eye on their trailing stops and act on them once they are triggered. And even after the regulatory uncertainties are finally lifted, we will wait first until the trend has changed in our favor before we consider Chinese tech stocks.

Just two days ago, Steve and Brian published an important portfolio update for their True Wealth Opportunities: China subscribers, as two of their trailing stops were hit...

One was for a manageable 15% loss... and the other trade, on Tencent, was closed out for a 48% gain. This shows you the usefulness of trailing stops...

As for whether you should buy Chinese tech stocks right now at these prices, Steve and Brian said they will continue to keep an eye on these companies... but don't consider right now a buying opportunity. There is too much uncertainty about the extent to which the Chinese government will clamp down... but when they see a time to own these shares again, they will relay that information.

This didn't come out of nowhere...

In the July issue of True Wealth Opportunities: China, Steve and Brian noted the trouble that was brewing and what came to light after Didi Global went public on the NYSE.

The company has more Chinese customers than Uber... Five hundred million – and a growing number of people in other countries – use Didi's transportation services. Uber meanwhile has about 75 million customers worldwide.

The company raised $4.4 billion when it listed on June 30. But on July 2, Didi received word from the Cyberspace Administration of China ("CAC") that it was being investigated for the way it handles data collected from its hundreds of millions of users.

Following this, Steve and Brian reported that they usually stay away from IPOs for reasons like these...

We make a conscious effort to avoid newly listed companies in this letter, for a simple reason... That's to give them time to deliver on their (usually lofty) promises, and to make sure there aren't any "skeletons in the closet" that could blindside investors.

The CAC investigation did more than blindside investors. It cut the legs from under them. The stock dropped as low as 22% below Didi's IPO price in the subsequent weeks.

What happened with Didi didn't have any direct connection with other Chinese tech stocks. But the sudden move from China's government scared investors and hurt sentiment.

At the time, the Hang Seng TECH Index had fallen "only" 7% (compared to its 14% fall over the last week) since the Didi investigations were announced... and Steve and Brian highlighted that the sell-off had carried over into a pair of their portfolio recommendations.

They stopped out of two positions this month... one for a 35% loss... the other for a 5% gain. Things have gotten worse since...

This is a real-time example of why you want to heed your trailing stops when they are triggered...

Anyone who held on to shares of these two companies Steve and Brian said to sell would have lost 23% and 8% more, respectively, as of this writing... and possibly more if shares continue to tumble.

That's the idea they stressed on Monday when they sent two more sell recommendations. As they wrote...

And as we've seen time and again, our trailing stops have proven to be very effective at protecting gains and preserving capital.

In other words, when your stops are hit, sell... and a buying opportunity for the leading Chinese names and little-known picks that Steve and his team identify will likely come down the road, but we're not there yet.

Be the first to know when that time arrives with Steve and Brian's True Wealth Opportunities: China newsletter. You can get started with a subscription right here.

Moving on, mix Amazon (AMZN) and cryptocurrencies and what do you get?

A lot of interest... and a higher bitcoin price.

As we mentioned on Monday, following reports that e-commerce giant Amazon might be getting into cryptocurrency payments, the price of the world's most popular crypto, bitcoin, jumped more than 20% earlier this week...

The move stemmed from a report from British business newspaper City A.M. that said Amazon is getting close to accepting bitcoin and other cryptos as a form of payment. Citing people familiar with the matter, City A.M. said that Amazon's plan to accept cryptocurrencies is "pretty much ready to roll"... like, by the end of the year.

The report sparked a "breathtaking mini-rally on the price of bitcoin," according to Crypto Capital editor Eric Wade. Bitcoin's price briefly climbed above $40,000 for the first time in six weeks. But the rally was short lived...

Shortly after City A.M.'s report, there was speculation that it might have been based on bad information. And after the close on Monday, Amazon denied the article's claims. This sent bitcoin's price lower, with the cryptocurrency falling about 5%.

Bitcoin is trading above $39,000 today.

But while Amazon denied the report, the company's actions say there is something to the story...

Last Friday, CNBC highlighted one of the e-commerce giant's job postings, seeking a blockchain and cryptocurrency expert. According to the job posting, here's the experience the employee should have...

You will leverage your domain expertise in Blockchain, Distributed Ledger, Central Bank Digital Currencies, and Cryptocurrency to develop the case for the capabilities which should be developed, drive overall vision and product strategy, and gain leadership buy-in and investment for new capabilities.

And an Amazon spokesman confirmed the posting and made extremely positive comments on cryptos in the process. Here's what the company said in a written statement...

We're inspired by the innovation happening in the cryptocurrency space and are exploring what this could look like on Amazon. We believe the future will be built on new technologies that enable modern, fast, and inexpensive payments, and hope to bring that future to Amazon customers as soon as possible.

So it's clear that Amazon is doing a deep dive into cryptos, even if they aren't ready to announce any plans at the moment. Otherwise, they wouldn't be so interested in hiring someone to build out crypto capabilities.

Any involvement from Amazon would be a huge boon for the crypto market...

Amazon is one of the largest e-commerce sites in the world. Roughly $450 billion in gross merchandise volume passed through its platform in 2020. That made it the largest e-commerce site in the U.S. and the third-largest in the world. Chinese shopping platform Taobao was top with $609 billion, followed by another Chinese e-commerce site Tmall ($593 billion).

Accepting these payments would open the door to cryptocurrencies for hundreds of millions of people. After all, Amazon has more than 300 million monthly active users.

Those are the first ideas that come to mind, but when we asked our resident crypto guru Eric about this report, he highlighted even more ways employing cryptos could increase the bottom line. As he wrote in a private e-mail, Amazon's involvement raises other questions with potentially promising answers...

Amazon is known for technological innovations that shrink their costs. Is this one of them?

Will their suppliers be encouraged to pay in bitcoin or cryptocurrencies?

Will the bitcoin wallet industry step up with easier, faster wallets so more people can join in?

And then there's Eric's most important question: If it's accepting the cryptocurrency as payment, will Amazon join companies like Square (SQ), Tesla (TSLA), and MicroStrategy (MSTR) in holding bitcoin on its balance sheet as part of its cash reserves?

These questions mean that Amazon wouldn't just increase bitcoin adoption on its own. But it could create a ripple effect across the crypto space that manages to pull more people and companies in.

It's not just Amazon we have to watch...

Apple (AAPL) is also reportedly looking to hire someone for a similar role for its payments business. And credit-card companies Visa (V) and Mastercard (MA) – two of the largest payment networks in the world – are preparing for crypto to hit the mainstream.

These big players wouldn't be doing all this research and investment if they didn't think that cryptocurrencies will play a big part in their future. And that's clear evidence that cryptocurrencies are here to stay...

As we hope you know by now, Eric believes there are incredible crypto investment opportunities today, and many of them are beyond bitcoin. In fact, when Eric went live last week with his Crypto Cash Summit, he talked all about them...

In part, Eric shared why investing in one particular corner of the cryptocurrency world today could be like buying bitcoin back in 2017 (when it was trading for less than $3,000). This is an idea that 99% of investors haven't even heard about.

The education will be well worth your time. Plus, just for tuning in, you'll get access to a free crypto pick... Listen to Eric explain all the details here.

The Fed Is Like My 'Poor Dad'

Robert Kiyosaki, the best-selling author of Rich Dad, Poor Dad, has an impassioned talk with our editor-at-large Daniela Cambone about the state of the U.S. economy. "I never saw an economy like this one, and if you are trusting what the Fed is doing, you need your head examined," he pleads...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 7/27/21): Automatic Data Processing (ADP), American Homes 4 Rent (AMH), American Tower (AMT), Brown & Brown (BRO), CBRE Group (CBRE), Costco Wholesale (COST), Dollar General (DG), Invitation Homes (INVH), Johnson & Johnson (JNJ), Coca-Cola (KO), Liberty SiriusXM (LSXMA), McDonald's (MCD), ResMed (RMD), Stamps.com (STMP), TFI International (TFII), Visa (V), Waste Management (WM), and Consumer Staples Select Sector SPDR Fund (XLP).

A quiet mailbag today... Let us know what's on your mind with an e-mail to feedback@stansberryresearch.com.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
July 28, 2021