2 years ago I said that investing in China was a good idea since stocks were undervalued there and the country was going to be the largest economy in the world. However, things have not improved and now with the government crackdown, it seems investing in China is no longer such a good idea. Two of my Chinese stocks, DouYu $DOYU and Qudian $QD are doing poorly.
Chinese Stocks $CHINA50 are generally more volatile that US tech stocks $NSDQ100 and that's why the 2 seems to be correlated as the same type of investor will invest in them, especially when bond yields were rising earlier this year. This led to a selloff for both. But today, only Chinese stocks are falling.
We need to understand how owning Chinese stocks work. Normally, foreign companies are listed in the US through American Depositary Shares (ADS) but for many Chinese stocks, because of regulations, they have to go through a VIE (Variable Interest Entity). That's why companies such as Alibaba $BABA are incorporated in the Cayman Islands according to their SEC filings. When you buy BABA, you're buying the VIE and not the real company. There is a contract between the two but there's always the risk that Chinese authorities may render them void.
The Chinese Government has been going after Chinese Big Tech as these companies have now become too big and powerful. Government always likes to keeps its monopoly on power. Besides, they are being cautious. It is better to have a crackdown on businesses before they get out of control.
China is still going to be the largest economy in the world and according to Ray Dalio, not investing in China is very risky. This selloff is just temporary, if we're thinking about the next 15-20 years, it is still a good idea to invest in China. But we should always be careful. China is not America.