Current US-China Relations
If you’ve been following the news, you would know that it’s a less than ideal start to the new year with regard to US and China relations. Anyone hoping for any reprieve may be in for a surprise.
Let’s start with the multitude of events that have happened, what with President Trump has been seen squeezing out of his final moments in the White House.
Delisting China Stocks in NYSE
This debacle has certainly grown arms and legs, which resulted during the week in a series of snakey turns as to whether the New York Stock Exchange (NYSE) would actually delist China’s 3 state-owned telecommunication companies, on the basis of ‘National Security’.
Readers should be aware that the 3 affected stocks are China Mobile, China Telecom and China Unicom, which allegedly have ties to China’s military.
How did China officially respond?
They’ve characterised the move as “arbitrary, reckless and unpredictable”.
What Happens after Delisting?
Let’s start with the less bad news first.
The fairly good news is, you do not have to worry as you will not lose your investments in their entirety. Once these stocks are delisted, it goes into the Over the Counter (OTC) market, where these shares can still be traded.
The less ideal news are:
1
OTC stocks are outside of the reputable and trusty exchange system. OTC stocks do not have ready access to a wide pool of major financial institutions, ready buyers, sellers and intermediaries.
2
OTC markets therefore are less liquid.
3
Established exchanges are part of a regulatory and institutional system that can offer certain investor protections. This will no longer be available to OTC stocks
Any Other China Stocks to be worried about?
Following the 3 China stock delisting saga, it was rumoured thereafter that the White House was also contemplating limiting American investments in Tencent and Alibaba, with the latter being threatened with a blockade on AliPay.
This certainly did not bode well for Tencent and Alibaba, as Alibaba which had (and still have) their own issues with the Chinese regulators.
The better news is Beijing will be caught between a rock and a hard place, especially when they feel the need to defend their own against a Washington attack, and may not act expeditiously against Alibaba and Ant Group.
Is Alibaba a Buy at current price?
Alibaba was listed on the USA stock exchange in 2014, and has been on a long term uptrend in line with the stellar growth of the company into a tech giant that, in recent times, worries the Chinese government greatly.
The market is efficient most of the time, and market participants make assessments on stock prices based on all past, current and expected (future) stock related news and information.
Based on information on hand, we can probably say the following has been taken into account with regard to the current Alibaba price:
- Past, current and future earnings (including the e-commerce sales revenue during Singles Day etc)
- Threats of Chinese government anti-monopoly investigation
- Rumours for online finance spinoff via Ant Group
- Request by government to tighten areas of non-compliance with regard to operational control
- Rumours and subsequent assurances of Jack Ma’s whereabouts
- Potential Alibaba delisting from US exchange
- Potential US blockade on AliPay
Arguments for Buying Alibaba
1
A lot of bad news have already been priced in, and therefore current prices offer relatively good reward to risk ratio.
2
- Max drawdown between 2014/15 is -52.5%
- Max drawdown in 2019 is -38.5%
- Current 2020/21 max drawdown is -33.8%
Arguments against Buying Alibaba
Alibaba was listed on the USA stock exchange in 2014, and has been on a long term uptrend in line with the stellar growth of the company into a tech giant that, in recent times, worries the Chinese government greatly.
The market is efficient most of the time, and market participants make assessments on stock prices based on all past, current and expected (future) stock related news and information.
Based on information on hand, we can probably say the following has been taken into account with regard to the current Alibaba price:
1
Past performance may not be reflective of future performance. While historically Alibaba is on a long term uptrend, there is no guarantee this may continue going forward.
2
- China government mandates Ant Group and Alibaba is broken up. This will significantly affect future revenue stream and growth potential, and therefore can be expected to further reduce stock prices.
- AliPay is blocked by the USA. International revenue will certainly be affected and therefore will materialise in decreasing stock prices.
- Alibaba has to delist. This will force Alibaba into the less liquid and least preferred OTC market which will result in risk adverse investors to sell off their Alibaba shares in response. Selling pressure will decrease stock prices.
Disclaimer:
AlgoMerchant does not hold any shares in Alibaba, nor are we paid by Albaba or any other affiliates to promote the company.
