10.07.18 | Alibaba and the Chinese share sell-off.

By Jessica Sier 2 July 2018 4 min read

Newsletter: Published Tuesday, 10 July 2018.

  1. Alibaba's unhelpful AI invention;
  2. The absurd characteristics of the Chinese share markets;
  3. Why Chinese shares are now in a bear market.

👀 ARTIFICIAL INTELLIGENCE

Alibaba Group

Alibaba has launched an AI tool that can write 20,000 lines of advertising copy per second.

That’s...extremely fast.

It’s...faster than what the bot writing these newsletters can do. By a margin.

It's possible you might think - and lots of techno-utopians do - that we are on the brink of a new productivity revolution. The “end of scarcity” if you will, where robots will produce everything necessary for human life, including but not limited to, advertising copy.

This would theoretically free us from the need to work.

If that is true, or true-ish, or a Simpsons idea that will possibly materialise as true, then the big problem will be the distribution of prosperity.

If robots produce abundance but eliminate jobs, the concern is that the people - presumably the tech founders and venture capitalists - who own the robots will become extremely rich and powerful, while the people who don’t will be unemployed and dependent on those founders and VCs for their advertising copy and other human necessities.

People feel differently about this possible future.

I mean, one answer might be to become one of those founder/VC types.

Another answer might be to invest in those businesses that are likely to run the infrastructure that underpins this techno-utopia.

But certainly, definitely, don’t become a copywriter.

So, I guess it’s a good thing that this newsletter bot has exposure to Alibaba in her Spaceship Universe Portfolio.

🇨🇳 A SMOOTH SEGUE

Let's talk about Chinese shares (because Spaceship owns a stack of Chinese companies).

The Chinese share market is a very peculiar place.

In Australia, the ASX is largely comprised of institutional investors - banks and large hedge funds. They make up around 60%.

Regular people whose full time jobs aren’t pouring over investment strategy are called retail investors and they make up the rest of the activity on the ASX.

Retail investors are also sometimes referred to as “punters” or “mum and dad investors”.

So, institutional investors are the professionals, retail investors are the punters.

But where institutional investors make up the bulk of the ASX, in China it’s the opposite.

80% of all investors in both Chinese markets - the Shanghai and Shenzhen exchanges - are punters. There are very few institutional or sophisticated investors who buy and sell shares in mainland China.

So when there are dramatic swings in Chinese shares, like the ones that have been happening these last few weeks, it’s because retail investors are pouring into the market. Or they are yanking their money out.

Share trading in China is a game that almost every layperson is into and very, very few professional investors hold large positions in companies. There are also statistics showing only 12% of Chinese retail investors have a university education and 70% of the new trading accounts that were opened in recent years are by folks who haven't finished high school.

It is a market based on momentum, not on valuation, and sometimes that momentum is absurd.

Like the time when all companies with “king” or “emperor” in their names experienced massive share price jumps because China moved to let President Xi Jinping stay in power indefinitely.

Or when a stock that sounds like “Trump Wins Big” soared after the 2016 Presidential election (and one that sounds like “Aunt Hillary” slumped).

These are kind of funny stories but they show how bizarre (and yet still powerful) the Chinese retail investor is in one of the largest share markets in the world (coming in at around $US6.4 trillion as of this week).

Institutional investors have avoided Chinese shares for a long time because the Chinese government has rather strict controls on how businesses operate.

This makes it somewhat difficult to reliably long term invest; the government might change the rules suddenly or restrict how much money you can borrow. (We’ve written about this before).

But China is also home to some of the most forward thinking and explosive technology businesses on Earth.

Alibaba Group, Tencent, Baidu and JD.com are all Chinese businesses (and all of these are in your Spaceship Universe Portfolio) with headquarters in China.

You also have a suite of mid-tier Chinese tech companies: Yum China, Sina Weibo, Ctrip, and NetEase. (Check them out in your app for a run down on the business models).

But the thing is, these Chinese multi-billion dollar businesses aren’t listed in China, instead, they all trade in the United States (where they are free from the foreign ownership restrictions and the herd-like mentality of Chinese retail investors).

📉 SELL-OFF

The Chinese share beating

Now - Chinese shares have taken a beating these last few weeks. Both on Chinese exchanges and on US exchanges.

In fact, they’ve had their worst start to a second half of a year since 2015!

Granted, we’re ten days into the second half of the year and 2015 wasn’t that long ago, so the intense panic about the sell-off in Chinese shares is probably a bit overstated.

But certainly, the Shanghai Composite is down 21% and is officially in a bear market.

(A bear market is where share prices slump 20% or more over a two month period.)

The reason for this sudden dislike for Chinese shares comes from the 25% price hike the United States has put on $US34 billion worth of Chinese goods.

This tariff came into effect on Friday.

If China wants to sell some tech and industrial goods to Americans, they now have to pay 25% more.

This is designed so Americans will want to buy things made in America because it’s cheaper than the Chinese things.

The Chinese government was rather irritated by this - because Americans are generally big fans of cheap Chinese things - and responded by whacking a 25% price hike on some American things sold to the Chinese population. (Largely agricultural products, designed to hit the rust-belt or the mid-west).

This is all very mature and both Chinese and American businesses who sell to each other are extremely pleased their governments are making it more expensive to do business between the world’s largest economies.

But when it comes to the Chinese companies in your Spaceship Voyager Portfolio, we’re not overly concerned.

Most of these ginormous tech firms are manufacturing and selling their products to Chinese nationals, not Americans, so the tit-for-tat trade war between governments isn’t necessarily going to impede their business.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist who currently heads up Spaceship's content. Prior to that she was a reporter at the AFR where she discovered breaking down financial bulls**t was a public good.

10.07.18 | Alibaba and the Chinese share sell-off.