A Didi autonomous taxi during a pilot test drive in Shanghai.
Hector Retamal/AFP/Getty Images
One of the most useful insights into successful investing is to be greedy when others are fearful and fearful when others are greedy. Xi Jinping seems determined to disprove the axiom.
China’s leader has targeted many leading technology companies in what appears to be, at a minimum, an effort to control data on Chinese citizens at home and perhaps also abroad. The moves are also rough reminders to China’s increasingly high-profile technocrats that Xi is more powerful than anyone.
Until recently, China’s government seemed content to smack around companies, but a new regulatory era seems to have begun—and investors are reacting to this differently than in the past.
China’s recent punitive actions have historically attracted steely investors who used bullish stock and options strategies in anticipation that the stocks would soon rally higher. But not this time. So far, the truly notable trades are protective strategies that would increase in value if Chinese stocks continue to decline.
Earlier this week, an investor adjusted an existing position in the iShares China Large-Cap exchange-traded fund (ticker: FXI) by taking profits on 5,000 August $46 put options and buying 10,000 August $43 puts for a 75-cent credit. The ETF was recently around $44. Similar trading occurred in the KraneShares CSI China Internet ETF (KWEB), when an investor rolled 20,000 July $64 puts to July $60 puts. Another investor bought 10,000 July $60 puts. The ETF was recently around $62.
Consider what has happened to DiDi Global (DIDI). The ride-hailing app just went public on the New York Stock Exchange. The June 30 $4.4 billion offering was one of the largest of the year, demonstrating the interest that investors have in Chinese tech companies. Goldman Sachs, Morgan Stanley, and JPMorgan were lead underwriters. Investors were excited. The deal size was increased to 316.8 million shares from 288 million.
But two days after the initial public offering, China’s Cyberspace Administration began probing DiDi over data-security concerns. The government ordered Chinese app stores to remove DiDi, and DiDi’s stock price collapsed. Two other U.S.-listed Chinese companies— Full Truck Alliance (YMM), a truck-hailing app, and Kanzhun (BZ), an online recruiting platform—were hit in a similar probe.
Though we have long advised patient investors to take advantage of weak share prices on major China stocks, the increased bellicosity of China’s government toward many of the nation’s top companies—especially those that collect data on people—makes investing in China at this time so perilous that it may no longer make sense for most people.
Existing positions can be managed by simply selling upside call options that expire in a month or so and that are, say, 5% or so above the associated stock prices. This overwriting strategy will help investors get paid to wait for a recovery, should one come.
With DiDi at $11.91, for instance, the August $12.50 call could be sold for about $1.30. The trade is small solace to anyone who bought into the excitement of the IPO, but it offers a way for shareholders to potentially enhance returns while waiting for better days.
Establishing new positions in China’s tech stocks is likely to prove too risky until it becomes possible to assess what the government might do next to exert control over the sector.
The rise of China’s middle class remains one of the greatest economic events we are likely see in our lifetimes, but Xi is proving to be an unreliable counterparty.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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