Beijing's crackdown on Tech sparks angst around Chinese shares. Can we still trust investing in Chinese stocks? What now? #chinasnewnormal #edtech #crackdown
CONTENT
In this video, I explain how investors have seen their Chinese shares plunge in July because of new crackdowns from Beijing. I explain why the angst makes sense, and why the VIE structure is conduit for future risk. The video explores what happened with Chinese EdTech companies, why the regulators made the move, and how Chinese EdTech companies will reinvent themselves. I do not offer buy or sell advice, but shed a light on which warning signs to look for and the timeframe it could take before everything settles.
00:00 Topic:Beijing's crackdown on Tech sparks angst around Chinese shares. Can we still trust investing in Chinese stocks? What now?
00:48 Why did EdTech companies lose most of their value in 24 hours? The reason is new regulation from Chinese government that makes non-profit from some of the main EdTech stocks
02:00 It seems the crackdown on Chinese tech is increasing? The crackdown has started on Nov 4th 2020 with the Ant Financial IPO that was halted, followed by Alibaba, Bitcoin mining, Didi, Tencent, and many more. They are all investigated for different reasons, and has nothing to do with 100-year celebration of Chinese communist Party. This is not about controlling Tech, not against capitalism, not to protect the party or to relocate capital back to China.
06:22 Why do investors not trust Chinese stocks? The reasons are obvious. It’s about the connection of many Chinese public companies that are linked to State Owned Enterprises, which cannot maximise returns for shareholders like private companies in the West. It’s about a history of fraud that we have experienced with Chinese companies listing on foreign exchanges. It’s also about the grey zone of the VIE structures and the risk of delisting from American stock exchanges as the SEC requests more transparency from now onwards.
09:05 What is a VIE? A VIE is a Variable Interest Entity that Chinese founders use to acquire a Chinese Internet Service Provider license to operate online business in China. Most large Tech platforms in China have created a VIE to list overseas, through a controlling entity in the Cayman Islands where foreign investors can invest in, which can control a WFOE in China that offers services to the VIE
13:20 Which Tech crackdowns are happening in China? Beijing is doing four main crackdowns. 1. FinTech crackdown regulated by People’s Bank of China. 2. Anti-Monopoly crackdown monitored by State Administration of Market Regulation. 3. Data crackdowns – Cyber, national security and data privacy – by Cybersecurity Administration of China. 4. Industry crackdowns organised by departments of different ministries such as Education.
17:57 What is banned for Chinese Ed Tech companies? The main ban is to make profit from tutoring or after-school lessens in holidays and weekends for subjects that are part of the education curriculum. School teachers are banned to offer after-school teaching on these subjects. Ed Tech companies cannot raise capital, list overseas or create a VIE structure.
21:06 Why is China cracking down on EdTech companies? The crackdown is to answer an unhealthy after-school education where children are overworked their whole childhood to prepare for the Gaokao exams. It is to rectify the situation that parents are spending a huge amount of cash on online courses to give their child a better future, which creates an inequality in society and a disinterest for parents to raise more children, which is a problem with a declining working population demographic. The government also responds to the most critical industry. – education – which is being hijacked by capital.
23:00 What will Chinese EdTech companies do now? Chinese EdTech companies will have to reinvent themselves to offer online courses for vocational training; professional education for age 18 or older; more quality education outside the curriculum such as art, sport or creative lessons; and focus on national priorities such as coding or chip design.
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