BABA: Chinese risk

I own BABA, a chunk with a cost basis of $90 (it may be much below due to trading profits). The stock is getting cheaper by the day. In the past I have posted that China is un-investable due to government policies. Yet I ignored my own thoughts and invested BABA on valuation and hoping at some point the government will relent. So far they have not. This article captures the political risk and at some point I need to look at getting out.

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The problem is if China attacks Taiwan and the United States gets involved what happens to your shares? I am worried the Chinese government will declare VIE’s illegal and leave everyone holding shares of a Holding company called Baba and not the company Baba. People that do not think this can happen don’t understand the structure of Chinese companies and what happened between Yahoo and Baba. I thought about buying in but the negatives are to large with Xi in charge.

Andy

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My understanding is BABA is American listed ADS/ ADR, and Citi the sponsor of ADR owns the underlying shares in Honk Kong exchange. I am expecting political risk in the nature of BABA the company being punished and not necessarily wiping off the ownership of ADR. If they chose to do, remember China is a country that depend on exports. So the retaliation will be swift and severe.

In any case it is 2% position.

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There is a reason why this name is so cheap. Clearly, I am highlighting Chinese risk, not underplaying it. The Chinese risk is much bigger in stocks like Apple, where the country can and has banned iPhone use by state employees and could easily extend it to other parts of the population. Again, here US and Western nations started it. But that’s besides the point. The China risk is there on many stock whether we explicitly recognize it or not.

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I would disagree. Can the Chinese government make Tim Cook disappear and take his company from him? Also the ADR’s are invested in Baba the holding company, not Baba the Chinese company. Read up on the VIE structure. It would be very easy for China to say that VIE’s are no longer legal and the ADR’s would collapse. Just understand the risk. As far as retaliation, how did that work when the Chinese government wouldn’t allow the SEC to audit Chinese companies? They threatened to remove them from the index but in never happened.

Andy

The honk kong listing allows to convert ADS into HK shares. IBKR allows you to open a HK account, and you can directly own shares in your account and not as ADS. Non Chinese citizens can own Chinese shares.

Separately here are some of the institutions that own.

Somehow the economic interest can be wiped off by China arbitrarily or China is going to do that anytime now is not real. But if you are so worried then you cannot own any assets in USD either. Routinely Texas confiscates out of state US citizen assets and you don’t see that ever again. I am not making this up, simply folks don’t want to talk about it. When Citi decided to reduce their business with gun manufacturers Texas and other Republican states retaliated. Lastly, US arbitrarily started confiscating many Russian individuals assets all over the world. You feel they are justified, but if you are on the other shoes you will recognize the irony. Between US and China, I am sorry to say, US actions are far more arbitrary and egregious.

None of this means I am defending China. I don’t trust China, it is a dictatorship. The point I am trying to make is, the risk of arbitrarily state can take an action is a risk at everywhere.

There are lot of political posturing. There are many suspect Chinese listings in the past. But BABA is a legit company. Separately, do you know US tech companies how hard fight against any local laws? In India Twitter, Google, META, Amazon, AWS all routinely break local laws and nothing short of Indian supreme court order they don’t comply with even the rudimentary laws. Specifically the cloud providers, violate data sovereignty rules at will. The same companies go great lengths to comply with GDPR.

The west generally has different set of standards for themselves and others. It is pretty evident in all spheres. With the rise of China and to a lessor extent India, this is being challenged. West will eventually adjust. But until then the Asian countries will be viewed with contempt is something I understand.

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So do you own the Hong Kong shares or do you own the VIE shares?

Andy

There are no VIE shares that you can own. I own ADR.

I am happy for you Kingran, I hope everything turns out great.

Andy

Do you know how cheap Chinese stocks are… Chinese government is considering tapping $278 Billion (or 2 Trillion RMB) off shore funds to shore up the market.

https://www.bloomberg.com/news/articles/2024-01-23/china-mulls-stock-market-rescue-package-backed-by-278-billion?srnd=premium

I am amused with this scenario. The damage will be to almost every stock in USA as the decoupling a world war will imply is far higher for more financialized economies like USA. Lack of Chips will hurt many industries in west far more and despite think tanks estimating 3-6% GDP drop it will probably be more than 12% GDP correction.

So please worry a lot on the USA , EU stocks in portfolio

We will probably find out if your right but right now it would seem I am winning. The S&P at an all time high and the Hang Seng at a 5 year low.

Andy

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I am sure US equity will outperform for a short term till someone starts worrying on debts increasing without tax or expense adjustments.
My comments were on a a statement which I should have quoted

I think you misunderstood what I was trying to point out Qunal. I wasn’t saying that the stocks would go down, what I was pointing to was the VIE structure that we had been talking about. That is the great unknown. It has never been declared legal in China and if a war broke out, it would give Xi more reason to declare them illegal with everyone that is invested in Baba on the exchanges outside China, seeing that they are only invested in a holding company that no longer has shares in a Chinese company.

Andy

I didn’t realize that for a conversion fee that you can convert your ADR shares for shares on the Hang Seng index. Does anyone know if the shares on the Hang Seng are under the VIE structure also? I don’t think they are but I can’t find anything about it.

Andy

I have been discussing this on Twitter and it looks like both the ADR’s on the American Exchange and the shares on the Hong Kong exchange are both VIE’s. It looks like in order to trade on the Beijing exchange or the Shanghai stock exchange you have to be a Qualified Foreign Institutional. I am not sure if those shares are under the VIE structure. It may not be possible for foreign investors to get away from the VIE structure.

Andy

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Like said in the first post, I violated my own rule and stuck with a bad cost basis, and a very cheap stock. if I can break-even I am out of here. There are many ways to make money. I know, I know, why not accept loss and move on? Unfortunately, my ego and the share in IRA makes it difficult :slight_smile:

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I think it is really cheap to Kingran and I am not trying to run this into the ground but was just interested if I could find a way to buy shares without being involved in the VIE structure. I learned a lot by digging deeper into this so thanks for the lesson. It was well worth it.

Andy

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