Big name investors with the power to move markets are cutting exposure to China as confirmed by 13F filings from the likes of Cathie Woods’ Ark Innovation ETF (ARKK) and George Soros. Close inspection, however, reveals a glimmer of opportunity among the rubble: Chinese electric car companies.
In a sharp U-turn from earlier in 2021 when global investors were pumping money into the country's domestic equities, Chinese stocks have suddenly become what not to own. Betting against the nation’s stocks has been one of the most crowded trades among managers over the past few weeks, and the sell-off continues.
Drastic regulatory measures taken to uphold China’s goal for common prosperity have global fund managers facing trillion-dollar losses after internet-oriented technology enterprises, private education firms and overseas listings were targeted.
As the Chinese government tightens its grip, regulatory pressure in the United States is intensifying. Securities and Exchange Commission Chair Gary Gensler has issued a direct warning against investing in Chinese companies, stating that investors are entitled to information that will assist them in understanding the political and regulatory risks before diving in.
While some will throw caution to the wind, investing in Chinese stocks now will test investors’ mettle, unless it’s in the one segment that remains relatively solid.
Scandals and negative press coverage concerning Tesla has seen drivers flock to local auto brands in the world’s largest car market. Electric vehicle sales from China’s Li Auto and Xpeng Inc have more than tripled in the past year, and doubled at Nio Inc, resulting in Tesla plunging as its Chinese competition soared.
Tesla sold only 8,621 cars in China in June – a 69% fall month on month and a 26% drop year on year. This is the first annual decline since Tesla opened its Gigafactory in Shanghai in January 2020.
Tesla is holding market share by increasing the export of cars from its Shanghai plant, but the company will need to make a concerted effort to regain the trust of the Chinese market. Customer accusations regarding quality issues and governmental concerns that onboard cameras threaten national security and data privacy won’t be easily swept under the rug.
As the expected kowtow by Tesla takes place, Chinese electric carmakers will accelerate their efforts to control the domestic market and with the Chinese government in their corner, this is the stock expected to ride out the unrest.