The Baron Speaks

Published on August 02, 2021, 8:05 am
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According to Investopedia, “Buy when there’s blood in the streets, even if the blood is your own.” is the complete quote attributable to Baron Rothchild, prominent British banker and shrewd investor during the Napoleonic Wars. Regarding Chinese stocks, there’s no blood flowing in the streets. But there is an endless supply of red ink flowing through the global capital markets. Were he around today, I think the Baron would be buying.

The debacle that has become Chinese stocks should be well known to most readers. First, in recent months there has been a continuous series of fines and restrictions by Chinese regulators aimed at a variety of Chinese tech companies. Then there was Ant, whose IPO got pulled at the last minute by Chinese regulators and whose world famous CEO Jack Ma suddenly did a disappearing act. Then the shares of ride sharer Didi plunged right after its huge US IPO, thanks to announcements by actions taken against the company again by Chinese regulators. And last week these same regulators announced a series of draconian measures causing Chinese US traded education stocks like New Oriental Education, Tal Education and Gaotu Techedu to plunge 95% or so. Poof! Up in smoke went billions of dollars of equity held by Western investors.

The bear case on Chinese stocks was put quite clearly if emotionally by Jim Cramer from his CNBC perch. The Chinese are out to hurt us, Cramer angrily shouted. China is showing its true communist colors! The CCP does not want its tech sector to get too much power. It will choose control over growth. It doesn’t want its companies doing IPOs abroad. Americans should not be investing in Chinese stocks. They should have learned a lesson from this.

The Contrarian Case

It is difficult to refute Cramer’s arguments since they constitute a simple but plausible explanation of recent events. Nobody really knows what the Chinese leadership has in mind regarding its capitalist tech sector. There is no question that, if the Chinese wanted to hurt America, arbitrarily wiping out the value of US owned Chinese tech stocks is one way to go. Given the arbitrary attacks on China and the mal-intentioned American attempts to restrain China’s development via embargoes and tariffs, the Chinese have reasons to get revenge. But the counter argument on this is that these actions if taken for revenge are incredibly self-destructive. China would be the biggest loser.


First the general direction of regulators in the US, Europe and China has been to reign in big tech companies. Big seems to be bad everywhere. But the Chinese regulatory process works differently from those in the West. In the West, there are lawyers and hearings and little in the way of surprises. But in China with its autocratic tradition that goes back 4000 years, things can happen quickly without public debate. I am not arguing that the Chinese system is better or that it won’t change as the Chinese get more sophisticated in these matters. But China today is a country where things can happen quickly. It took eleven months to build the Tesla Gigafactory in Shanghai. Construction time of the Tesla Gigafactory in Germany, thanks to environmental and other bureaucratic holdups, may rival the Thirty Years War for duration.

Second, the Chinese regulators held an emergency conference call last week with Western bankers. Reports are that it was to calm the waters and to reassure Western investors that the trashing of the educational sector was a one time event and would not be extended to other sectors. The Chinese do have some learning to do in dealing with global markets. The message the Chinese seem to be handing out is that they only wanted to destroy this one specific industry.They did this for social reasons they regarded as worthy. I think the markets will believe them and eventually forget the destruction of capital in the educational sector. 

Third, if you believe the Chinese are not out for self-destructive revenge but rather are determined to turn their country into an advanced technological and prosperous nation, then now is the time to look at Chinese stocks which sell at some discount to their Western equivalents. The economic models don’t always capture this but investing in China is investing in a people who score high on intelligence tests, who work hard and who are obsessed with material progress and technology. I may be alone in this but as an American I do not see the Chinese desire to be number one in technology as evil or a threat to the United States. If China continues on its rapid development path, it is inevitable and normal that, with 1.4 billion people vs 330 million in the United States, China will pass the United States.

Fourth, the reason given for the destruction of the for profit educational sector has a certain logic. The Chinese government is deeply worried about the collapse of the birth rate. It argues that tutoring and related educational classes increase the cost of raising a child. Eliminating tutoring supposedly will incentivize parents to have more children since raising a child will now be cheaper. And it will be a step towards a more egalitarian society. And children will have more playtime, the lack thereof many critics of Chinese education lament. Unfortunately for the Chinese government, the results may turn out to be the opposite. Chinese tiger moms (and dads) may spend more on private tutors to replace the online ones that have been shut down. Chinese kids have to prepare for the gaokao, a grueling three day college exam that determines whether or not they get to go to college.(The gaokao is accepted by many American universities.) No expense is spared by parents. China is not alone dealing with the birth rate decline. All the Confucian countries in Asia, for example Korea, Japan, and even Singapore, have seen their birth rates decline to worrisome levels. Korea for example like China has tried to reign in tutoring.

Fifth, it should be noted that it is so much easier for Americans to buy individual Chinese stocks if they are traded on American exchanges. American politicians who want to kick Chinese stocks off US exchanges are not doing their fellow Americans any favors. Retail investors who own suddenly delisted Chinese stocks may wind up owning stocks they cannot sell.

Author, speaker, analyst and editor for The Dismal Optimist, a global macro economic blog.