What happened
Stock markets are glowing green once again on Tuesday, but you probably won't believe what some of the greenest tickers of all are today: Chinese education stocks.
That's right, the industry that saw declines of as much as 74% for New Oriental Education (NYSE: EDU), 76% for TAL Education(NYSE: TAL), and 78% for Gaotu Techedu(NYSE: GOTU) last month in response to China's sudden crackdown on for-profit education companies, is bouncing back today.
As of 1:40 p.m. EDT:
TAL Education stock is back up 17.3%;
Gaotu Techedu is rising 22.2%; and
New Oriental Education is up an astounding 29.7%.
So what
Crazily, the reason for all this excitement seems to be... more Chinese regulations! So far this year, regulators in China have enacted "anti-monopoly rules targeting so-called platform companies," "draft rules to stop unfair competition in the internet sector," and a major data privacy law -- all on top of regulations specifically designed to curtail the popularity, and profitability, of for-profit education services.
That certainly doesn't sound like it should be good news for Chinese education stocks, but here's the thing: CNBC reports that with the passage of the data privacy law -- the "Personal Information Protection Law" -- China's regulators may have finally put in place the last piece in their planned legislative agenda to bring the tech industry to heel.
Now what
The hope now, according to CNBC, is that China's "unabating lawmaking for the tech industry" is at an end and that regulators will finally "take a pause in 2021" -- allowing investors to assess the damage and maybe even do a bit of bargain shopping in stocks that have been punished worse than the legislation merits.
That sounds like good advice to me. My only real worry is that, well, it's only been a few days since the Personal Information Protection Law was passed Friday. That could prove to be too little time to be certain that the "unabating lawmaking" really has stopped and that there aren't more shoes yet to drop.
While I certainly understand the attraction of trying to buy in at the bottom after these stocks have fallen so far already, there's still a danger that, in reaching out and trying to snatch a bargain, you might instead grab hold of a falling knife. The better strategy might be to wait a few days, make sure no new laws appear, and then evaluate how profitable these companies can still be in light of the laws that have already been passed.
There are too many unknowns to predict a recovery for the Chinese education business, and the government seems intent on completely disrupting the current business model. I wouldn't bet against the government's desire to restrict advertising and the time burden on students and parents when it comes to schooling. That's why this is an industry I'll watch from afar for now.
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Best Chinese Stocks Across Many Industries
As the world's largest internet market, it's no surprise to see big growth from China stocks focusing on e-commerce, messaging, or mobile gaming. Notable Chinese internet stocks include:
- Alibaba (BABA)
- JD.com (JD)
- Pinduoduo (PDD)
- Tencent (TCEHY)
- Vipshop (VIPS)
- Baidu (BIDU)
- Tencent Music Entertainment (TME)
- NetEase (NTES)
- Trip.com (TCOM)
- Dada Nexus (DADA)
- Bilibili (BILI)
- Joy (YY)
- KE Holdings (BEKE)
Several Chinese companies are becoming serious rivals to Tesla (TSLA) in the world's biggest auto market in electric vehicles.
Several Chinese financial firms or brokerages are listed in the U.S.
Several China stocks are in solar power.
For-profit education Chinese stocks are a notable non-tech sector.
- New Oriental Education (EDU)
- Tal Education (TAL)
- 17 Education & Technology Group(YQ)
- Gaotu Techedu (GOTU), formerly known as GSX Techedu.
Don't forget stocks in other fields, such as riding-hailing firm Didi Global (DIDI), beauty products maker Yatsen (YSG), or data-center operator GDS Holdings (GDS).
Beijing Crackdown On Chinese Stocks
Investors should be aware of significant risks with investing in Chinese stocks. The authoritarian state and its regulators can impose sweeping restrictions, fines, or bans on major companies, often with little notice or transparency.
That risk has been very apparent over the last several months.
Alibaba ran afoul of regulators in late 2020, with regulators opening probes into internet platforms and suspending the Ant Group IPO. In April, China fined Alibaba $2.8 billion for anti-competitive actions and ordered it to change various practices. Alibaba affiliate Ant Group limiting the scope of some of its businesses to comply with regulators' demands.
Further antitrust probes and fines are likely for other internet giants.
China's cybersecurity regulator earlier this month ordered app stores to remove Didi Chuxing, just days after Didi Global (DIDI) held one of the biggest U.S. IPOs in years. That came just days after announcing a probe and ordering Didi to suspend new user sign-ups. The cybersecurity regulator said Didi violated restrictions on collecting and using personal information but didn't offer any specifics.
More broadly, China will impose cybersecurity reviews on the internet and data-centric companies listing overseas. Hong Kong listings appear to be exempt, suggesting far fewer Chinese companies listing in the U.S. going forward. Many big U.S.-listed Chinese companies already have secondary listings in Hong Kong.
For-profit school operators, including New Oriental Education (EDU), TAL Education(TAL), and Gaotu Education (GOTU), crashed on July 23 as Beijing mulled whether to make after-schooling tutoring firms nonprofit. These stocks had already fallen sharply in 2021 as regulators and leaders signaled new restrictions.
Beijing later confirmed for-profit restrictions, triggering continued huge losses in Chinese school stocks and big losses among U.S.-listed China stocks. China also is setting new rules on app-based delivery firms and has signaled it may target the property sector. Finally, Beijing has hinted at even-tougher rules for Hong Kong and Macau.
On Aug. 3. Chinese state media criticized online gaming as "spiritual opium" for adolescents. China has cracked down on online gaming firms previously. Tencent(TCEHY), NetEase (NTES), and Bilibili(BILI) were big losers.
The Communist Party's Central Committee on Aug. 10 issued a new five-year plan that calls for greater regulation across a broad scope of businesses and the economy, triggering fresh losses on Chinese stocks.
On Aug. 17, the Ministry of Industry and Information Technology issued a draft rule governing competition among online platform operators.
Tencent and for-profit educators stressed regulatory impacts on future growth in recent days.
On Friday, Aug. 20, China approved a new data privacy law, raising concerns of further crackdowns on internet firms and companies that rely heavily on consumer data.
Chinese Stock Risks, Continued
Accounting fraud, while less likely with institutional-quality names such as Alibaba, remains a concern. Luckin Coffee admitted to widespread fraud in 2020. Fraud charges alone can trigger massive share price losses.
Meanwhile, a new U.S. law could force Chinese companies to delist from U.S. markets. That threat isn't imminent and could be averted with negotiations over accounting oversight between the Treasury Department and Beijing. Still, it's something that could loom large for China stocks in the coming years.
The SEC has halted U.S. IPOs and other sales of securities by Chinese companies as it crafts new investor disclosure related to the risks of regulatory crackdowns.
SEC Chairman Gary Gensler on Aug. 16 gave direct warnings about investing in Chinese stocks, saying many U.S. investors don't know enough about the companies.
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