It’s a crazy world out there! Rui Ma on this week’s wild stock market fluctuations in China

Chinese stock markets and shares of Chinese companies listed in the U.S. began dropping precipitously on Monday. But yesterday, after a feel good message for the markets from the government, the stock markets in China bounced back vigorously.

To help understand what is going on, I spoke to Rui Ma of TechBuzz China. Rui has more than fifteen years of experience in technology and finance in the U.S. and China, ranging from seed stage to pre-IPO investing. Her resume is studded with names like Morgan Stanley, Merrill Lynch, Tsinghua, and Harvard, and she is one of the most astute observers of business, technology, and deal flow in China and Silicon Valley.

She answered my questions by email on Wednesday evening, March 17. This is part of my Invited to Tea interview series.

—Jeremy Goldkorn

This week has been a roller coaster. Monday started out with Chinese stock markets tanking and then shares of Chinese companies. Why? Was it COVID spiking in China? Russia invading Ukraine? Regulators fining Tencent? What spooked investors earlier this week?

If we are talking about ADRs [i.e. Chinese companies listed on U.S. stock markets], which is a bucket that contains a lot of Chinese internet companies, then the decline has been pretty steady over the last year, so the better question might be what hasn’t spooked investors, since all of the things you mention have.

If we are talking about the domestic markets, it is not much more clear, unfortunately, but COVID and Russia are good starting bets. What I’ll do here is answer all of the above, and raise you some more:

On the regulatory front, you forgot about delisting risk, which was brought to the forefront once again when the SEC notified five Chinese companies that they could be delisted if they do not allow their audits to be inspected by the Public Company Accounting Oversight Board (PCAOB). This has been an ongoing discussion between the two nations’ financial regulators for nearly a decade, but became a ticking time bomb when the Holding Foreign Companies Accountable Act (HFCAA) was signed into law in December 2020.

So that’s been a storm cloud that’s been hanging over ADRs for many months now, and even though the notifications were expected and more are forthcoming, try telling that to jittery investors.

Furthermore, while the most recent economic data coming out of China was actually fairly positive, all things considering, with the country reporting better-than-expected growth in retail sales, fixed asset investment and industrial production to start the year, there is skepticism over whether or not that’s sustainable, since consumption has been sluggish for a while now. The real estate sector, which the government is trying to overhaul, has been especially embattered and that’s a really big deal in any country, but especially in China where so much wealth and growth is locked up in that sector.

If you ask me though, all these pale in comparison to the risk that China gets secondary sanctions as a result of the Russia-Ukraine war. The government has come out and flatly denied offering any military aid to Russia, of course, but I think many investors are continuing to be conservative because the downside is too massive — look at what’s happened to Russian stocks, a nosedive doesn’t even begin to describe it. JPMorgan famously issued their “China is uninvestable” report on Monday, naming geopolitical uncertainty and delisting concerns, and I know that was extremely widely read.

And although this Reuters’ op-ed didn’t come out on Monday but the day after, the initial misleading headline — which made it seem like the government was going to dismember Tencent — didn’t help at all either.

Everyone’s on edge these days. There are also rumors going around that there have been large scale liquidations that have put further pressure on prices. (Hillhouse, the mega China-focused hedge fund, had to come out to debunk one such theory.)

It’s a crazy world out there!

Today [March 16], there was a feverish rebound in share prices, especially of tech companies. It came after Beijing signaled support for the market at a meeting on Wednesday that was chaired by Liú Hè 刘鹤, who is perhaps the closest thing China currently has to an economic czar. What should we make of the rebound?

The rebound, while impressive, is coming after an extended period of declines, so on an absolute basis, most companies are still trading well below the level they were at a year ago, so it is more of a respite from even more slaughter than a reason for celebration, unless you jumped in right after JPMorgan called the bottom.

As for the content of Liu’s meeting, most of it was not new, as it pertains to China tech and ADRs anyway, but having a person of his stature repeat it and add a few more important words of assurance was apparently very calming for many investors. It seems to me that there persists a sense that — even if it came from the State Council or NDRC directly, as was the case for some of these directives conducting regulatory changes with transparency and speed, for both positive and negative reinforcements — it still doesn’t carry nearly as much weight as when someone perceived to be close to and trusted by Xí Jìnpíng 习近平 says it, someone like Liu.

But with regards to financial markets, he did note two things that were especially helpful.

One, he mentioned the Hong Kong Stock Exchange specifically and emphasized that more coordination will be done to ensure its stability.

Second, he said that new policies that affect the capital markets should be coordinated with the relevant financial authorities. Well imagine if they did that before axing the entire edtech sector overnight! And oh, I do have to add that it did also help that Liu addressed concerns regarding the real estate sector as well, as the rectification of that sector has been a huge drag on people’s portfolios and the entire economy as a whole.

Overall though, I would say that investors should still be cautious because a more transparent, speedier, and better communicated regulatory process doesn’t mean that more regulations and reforms aren’t incoming that could impact your portfolio negatively. You need to truly understand what you’re investing in and how the company and the sector fits into China’s overall growth goals and continued economic transformation.

You’ve been broadly bullish on Chinese tech companies over the last few years, as I myself have become more and more pessimistic about many things in China, including the future of its tech stars. How are you feeling in March 2022?

Over the long term, I’m still “broadly bullish,” as you say, but I’m also only indirectly invested in the public markets and much more directly involved in the private, specifically early stage technology startup investment space, so that tells you where I think some of the most interesting opportunities are.

I’ve written a lot about this, but there was a convergence, then what is now looking like a divergence, in what entrepreneurs work on in China versus in the U.S. Here’s what I mean. From 2010 to 2016 thereabouts, China’s ecosystem turned away from one that was consumer internet and gaming-heavy into one that looks more like the U.S. a few years ago, with enterprise software and healthcare becoming the top sectors. But in the last two or three years, while fintech continues to be a highlight in the U.S., China has seen tremendous growth in advanced manufacturing, which includes semiconductors, IoT (Internet of Things), materials science, etc.

To put it somewhat simplistically, China is focusing on the real (and specifically its manufacturing-heavy) economy, whereas the U.S. has continued to innovate in its financial economy. And this is happening due to market opportunity, underlying enabling factors — such as the fact that China simply does so much of the world’s manufacturing — and government policy. So while many of the Chinese regulatory interventions have been targeted at platform companies, those are actually primarily winners of the past decade, and a whole new crop of tech companies are emerging in China.

Add to this the fact that even in the “older” industries such as ecommerce and social media you have Chinese companies building very competitive businesses abroad — I’m thinking of ByteDance and Shein in particular — then there are plenty of opportunities to uncover. Of course, macroeconomic, geopolitical and regulatory risks can derail any number of individual companies or sectors, but the foundations of building a great company — talent, management, and capital — are as strong as they’ve ever been for Chinese tech.

How do you see agri-tech in China right now? Is there another sector in the Chinese tech scene that is grabbing your attention right now and that is maybe different from what you see in the U.S.?

Agri-tech is not a sector I spend much time on, but it is a huge opportunity, which I’ve written about here. China is both a big producer and importer of food, and in terms of production, it still lags behind the U.S. greatly in terms of efficiency per worker. There are obviously technical solutions that can be implemented to improve this, but in China, there will also need to be policy changes. In addition, distribution is also hugely wasteful at present and could be greatly improved. There is also a “chokepoint” technology when it comes to Chinese agri-tech though, and that is seed technology, which China lacks, and has been likened to a situation that could be as dire as the whole semiconductor business.

Finally, Sequoia China’s Neil Shen has talked about investing in agricultural microbes as one of his five proposals to the government in technology. Microbes can greatly enhance yield while being gentle with the environment, and is something China greatly lags in.

As for myself currently, I’m focused on investing in businesses that have great potential to be global while leveraging something from China tech, either talent, technology, supply chain or business model. So a lot of what I see is different! A big difference is probably the popularity of web3 / crypto in the U.S. versus its relative absence in China due to regulations. I’m not focused on that at the moment though, but it is such a remarkable difference in activity that you simply can’t miss it. I’d love to do more in climate tech, I suppose, but that’s a bit outside my personal expertise. It is very hot in China, however, so maybe I’ll find something anyway, we’ll see!

Invited to Tea with Jeremy Goldkorn is a weekly interview series. Previously:

Anthony Saich on how China sees the Russian invasion of Ukraine