Revisiting Chinese Stocks On Xi's Coronation

The West thought that capitalism would help remake China in its image. Instead, China remade capitalism in its image. Now, Xi Jinping has taken a step further by hoping to remake China his image.

After the Party's party this week, Xi has cemented himself as one of the great historical Chinese leaders and has paved the way for a third term and beyond, breaking with the pattern of serving only two terms. All it took was a little rewriting of history, and Xi joined the ranks of Mao Zedong and Deng Xiaoping, the latter of whom directed China's economic rise. Senior party officials formerly elevated Xi to the ranks of these other era-defining leaders in a "historic resolution," the full text of which has yet to be released. However, at a press conference post meeting, Jiang Jinquan, who heads the party's policy research office, gave us a taste of the love Xi received, saying:

"As long as we uphold Comrade Xi Jinping as the core, ... the giant vessel of Chinese rejuvenation will have a helmsman and will be able to brave any storms." Leaving aside whether or not Mao Zedong is the kind of company anyone should want to be included with, the fact of the matter is that Xi could rule for the foreseeable future.

While, like all the Party's parties, this meeting, known as the Sixth Plenum (could they make it sound more Star Wars Empire-ish if they tried?) was held in secret, one can only assume that the festivities were filled with chest-pounding crowd-pleasers including discussions of the inevitable invasion of Taiwan—a likely crowd favorite at these secret shindigs. But publicly, however, the Xi spoke of the necessity to quell regional hostilities.

The Asia-Pacific region cannot and should not relapse into the antagonism and division of the Cold War era. But something tells me Taiwan's president, for one, might be a bit skeptical. I know I am.

What This Means for Chinese Stocks

So, what does this mean for stocks, Chinese or otherwise? Now that Xi isn't going anywhere, U.S. defense stocks are a great bet. Lockheed Martin LMT, Raytheon RTX, Northrup Grumman NOC and even the bumbling Boeing BA are bound to bounce, for some conflict with China on the issue of Taiwan is all but guaranteed. At the end of 2020, the U.S. government announced $5.1 billion in arms sales to Taiwan in a report from Reuters and since then tensions have only increased.

As for Chinese stocks, the continuing cold war with China does not bode well for investors. What's more, whether the worst of Xi's regulatory crackdown on the once favored BAT stocks is still up in the air. There may be reason to hope. Now that Xi has all but secured himself as president-for-life, will he back off a bit and allow the nation's big tech superstars to regain some momentum?

Buying BATs

Regarding the BAT stocks, known as the FAANG stocks of China, I am not sold on any of them at this point. While the recent bounce in Baidu BIDU is encouraging, a result of China's demand that companies like Tencent TCEHY—the "T" in the acronym— display their social media content in internet search results. The only internet game in a town where Google GOOGL is banned, Baidu stands to benefit. But if China stays serious about busting monopolies, the fact that Baidu is the only game in town might cause a further crackdown on the company. Baidu is not a sell by any means, but it is not a screaming buy at this moment either.

As for Alibaba BABA, the disappointing Singles Day showing just proves this is not the time to buy. As for Tencent, the video game giant's revenue has been seriously slowed on Beijing's effort to limit the amount of time kids can play video games. New game approvals have also slowed, sparking fears of another 2018, the year when China suspended approvals of new video game titles over a nine-month period.

So, hold on the BATs for now. There are only two Chinese well-known stocks in the tech / e-commerce sector I would feel comfortable buying even after the recent pop: JD.com JD and Pinduoduo PDD.

Both stocks had a great Singles Day showing—and their stock prices reflected that fact. JD.com is the bigger of the two, but despite its size, it has managed to avoid Xi's wrath thus far. The company is moving aggressively to expand overseas to challenge Amazon AMZN while Pinduoduo is focused exclusively on China's domestic market. Of the two, I like JD.com longer-term. Pinduoduo, however, offers more volatility and thus higher potential short to mid-term gain if traded well.

On second thought, you may just want to forget those Chinese stocks and buy Beijing favorites like Tesla TSLA and Apple AAPL instead.

After all, I'd bet money that Elon Musk and Tim Cook were the life of this week's secret Party.