China Technology – The Turn?

Jack Ma may again be the turning point.

• Jack Ma’s potential meeting with President Xi is a sign that after 4 ½ years, the Chinese state may have had enough of stagnation and could be prepared to let the private sector have a much freer hand.
• This is precisely what RFM and Alavan Independent have thought is required to get technology innovation and investment going once again in China and the stock market is already reacting.
• A range of entrepreneurs including Jack Ma and Liang Wenfeng from DeepSeek have been invited to meet some of the most senior members of the CCP but the real question is whether or not President Xi will also make an appearance.
• In November 2020, Mr Ma publicly criticised the Chinese banking sector and, because the sector is state-owned, the state itself.
• This was viewed by the CCP as the private sector challenging the CCP’s authority, and so a brutal crackdown on the technology sector quickly ensued.
• Entrepreneurs were called in for questioning and Mr Ma disappeared from public view for several years and everyone was sternly reminded who really is in charge in China.
• This combined with the Covid pandemic has left the Chinese economy in a poor state with very weak domestic consumption which the state is trying to offset by boosting exports.
• The gloom has had a dire effect on innovation as no one wants to take any risks or invest in start-ups which is where the real innovation in any technology ecosystem happens.
• Instead, venture capital companies have become debt collection agencies focused on getting money back rather than handing it out.
• This, combined with the heavy hand of the regulators who can do anything at any time with no warning has hammered innovation which is the very thing that China needs to fulfil its goals of becoming a technological and geopolitical leader.
• It has also hammered the Chinese stock market such that China’s leading technology companies can be found trading at a 12-month-forward PER of 12x or less.
• The risks of investing in China are greater than they were 10 years ago but the position of the Chinese state may be shifting.
• If President Xi is willing to meet Jack Ma (who triggered the crackdown) it would be a concrete sign that President Xi’s hardline on the private sector may be shifting.
• This in turn could lead to a lightening of the regulatory burden and bring back confidence that the private sector is operating with the approval of the state rather than just being barely tolerated.
• Giving the private sector more air to breathe should return activity to the moribund venture capital ecosystem and bring innovation back to life.
• In the innovation ecosystem, confidence is almost as important as the money itself which is why President Xi making an appearance in person with Jack Ma is so important.
• DeepSeek was the catalyst which proved that despite the restrictions being placed on it by the US, China can create AI that performs in line with the global leaders.
• However, a shift in attitude by the state is needed if the “DeepSeek” effect is to spread through the rest of the technology sector and bring it back to life.
• If that shift fails to materialise, then this will be yet another false start that peters out with holders of beaten-up Chinese technology shares taking the opportunity to sell out of their positions.
• This rally feels very different to the blips we have seen in the last few years, but it will take President Xi’s endorsement to make it real.
• It is still very early days as most Chinese technology companies remain extremely cheap meaning that there is still a lot of upside as long as President Xi is on board.