China vs USA – Tit for tat.

Storm in a teacup.

• The SEC has added Alibaba to its list of Chinese companies that will be delisted in 2024 in a move that in my opinion is really just part of a negotiation that will end up with Chinese companies staying listed in the USA should they so desire.
• Nonetheless, Alibaba’s share price has tanked again on the news in a stark reminder of just how fragile sentiment towards Chinese companies is and how much more work the Chinese state has to do to rebuild trust with investors.
• In my opinion, this list was created by the SEC for the sole purpose of putting pressure on China and making it harder for Chinese companies to access foreign capital.
• This feeds directly back to the ideological struggle that is ongoing between the two countries both of whom are racing to become the global technological superpower.
• At the moment, there is no doubt that the USA is in front thanks to its position in semiconductors, but in newer technologies like AI or supercomputing, the race is much tighter.
• Consequently, this list is merely a tool of the USA administration to choke off the supply of capital to Chinese companies and thereby slow its technological development.
• The SEC’s complaint is that the books of Chinese companies are not being made available for an audit every 3 years which is very convenient for the USA as currently, this is illegal in China.
• However, the China Securities Regulatory Commission (CSRC) has said that it would change the laws that would allow the 3-year audits from overseas (see here).
• Despite this, I suspect that the CSRC has yet to actually fulfil its promise and the SEC has moved Alibaba onto the list to remind the CSRC that simply saying that it will change the law is not enough.
• The CSRC has until 2024 to change the law and allow the audits as the companies on the list will not be delisted before that time.
• Consequently, I suspect that this “negotiation” will continue for some time, but at the end of the day I am pretty sure that China will accede to the USA’s demand and Chinese companies will remain listed in the USA.
• I can’t see any new ones listing there but those that have survived that regulatory apocalypse at home should survive and eventually thrive.
• I continue to think that the worst is over for the Chinese technology sector as the state seems to have realised that if it wants to become a technological superpower, crushing the sector beneath its heel is not the way to go about it.
• Hence, for the companies that have a viable business, like Alibaba, it is only a matter of time before things improve.
• Alibaba continues to trade at a fraction of the valuation of Amazon despite transacting more business through its sites and making a lot more money.
• I am sticking with my beaten-up position in this company as the fundamentals of the business remain intact and the regulatory issues have largely been dealt with.
• Patience is going to be the key with this one.