TikTok's Drama Boosts Chinese Consumer Stocks

The drama surrounding TikTok, the popular short-video sharing app owned by the Chinese company ByteDance, has had an unexpected impact on the investment landscape. While the app itself has been the subject of controversy and scrutiny, particularly in the United States, the attention has inadvertently boosted the prospects of some Chinese consumer stocks. Here's how the TikTok drama is helping to power up these stocks and what investors should consider when evaluating their long-term prospects.



The Geopolitical Tension Surrounding TikTok

The geopolitical tension surrounding TikTok has created a complex investment environment for Chinese consumer stocks. Regulatory risks, reputation risks, market access limitations, and investor sentiment have all been impacted by the controversy. Investors must carefully consider these factors when evaluating the investment potential of Chinese consumer stocks.

*Regulatory Risks*: The U.S. government's concerns about TikTok's data security and censorship have led to potential bans and restrictions on the app. This regulatory uncertainty can negatively impact the overall investment climate for Chinese consumer stocks, as investors may be hesitant to invest in companies with potential regulatory risks.

*Reputation Risks*: The negative publicity surrounding TikTok and its parent company, ByteDance, can spill over to other Chinese consumer stocks. Investors may associate these companies with similar risks, leading to a decrease in their stock prices and investment appeal.

*Market Access*: Geopolitical tensions can limit market access for Chinese consumer stocks, making it more difficult for them to attract foreign investment. For instance, the U.S.-China trade war and the subsequent decoupling of the two economies have made it harder for Chinese companies to list on U.S. stock exchanges.

*Investor Sentiment*: Geopolitical tensions can negatively impact investor sentiment towards Chinese consumer stocks. Investors may be more cautious or risk-averse when investing in companies from a country with which their own has political tensions.

Key Factors Driving the Rally of Chinese Internet Stocks

The rally of Chinese internet stocks in December 2022 was driven by several key factors:

1. *China's Reopening*: The Chinese government's abrupt about-face from "zero-COVID" lockdowns to a rapid reopening last month boosted investor confidence in the country's economy and its tech sector. This policy change led to a significant rally in Chinese internet stocks, with iQiyi (IQ), Bilibili (BILI), and Tencent Music Entertainment (TME) gaining 78.5%, 36.5%, and 18.1%, respectively.
2. *Easing of Tech Regulations*: The government appeared to be taking its foot off the neck of the tech industry, with more video game approvals and reports suggesting authorities approved Ant Financial to raise more financing. This easing of regulations was another catalyst for the rally, as investors welcomed the reduced uncertainty in the tech sector.
3. *Positive Company-Specific News*: Each of the three companies (iQiyi, Bilibili, and Tencent Music) had some positive news in December that contributed to their respective rallies:
* iQiyi had an exciting product release, a virtual reality game show called Memoon Land, and launched its own VR/AR headset called Qiyu.
* Bilibili announced layoffs, which were seen as a necessary step to boost its bottom line and improve growth prospects.
* Tencent Music received an upgrade from Morgan Stanley analyst Alex Poon, who noted that the company's music streaming segment had achieved breakeven and that live streaming declines were stabilizing, paving the way for annual earnings growth of 10% or more over the next three years.
4. *Valuation and Bargain Hunting*: After a two-plus-year bear market, many Chinese tech companies had cut their costs and become more efficient, making them attractive to bargain hunters. Additionally, the underperformance of Chinese stocks relative to other global indices created opportunities for investors seeking cheap valuations.



Sustainability of the Trend

The sustainability of this trend depends on several factors:

* The success of China's reopening and the government's ability to manage the COVID-19 outbreak.
* The continued easing of regulatory pressure on the tech sector and the government's commitment to supporting the industry's growth.
* The performance of individual companies and their ability to execute on their strategic plans.
* The global economic outlook and geopolitical risks, which can impact investor sentiment and capital flows.

While the rally in Chinese internet stocks was driven by several positive factors, the sustainability of this trend will depend on the successful navigation of these challenges and uncertainties.

Regulatory Risks and the Potential for Excessive Regulation

Regulatory risks and the potential for excessive regulation pose significant long-term concerns for Chinese tech stocks. The uncertainty over the regulatory stance, potential for excessive regulation, impact on long-term growth, and dependence on government favor can hinder the growth prospects of these companies and make them less attractive to investors in the long run.

Investors should carefully consider these factors when evaluating the long-term prospects of Chinese tech stocks. While short-term rallies may occur due to changes in government policy, the uncertainty and potential for excessive regulation can hinder these companies' growth prospects and make them less attractive to investors in the long run.

In conclusion, the TikTok drama has inadvertently boosted the prospects of some Chinese consumer stocks, but investors must be cautious and consider the geopolitical tensions, regulatory risks, and long-term sustainability of the trend. By doing so, they can make informed decisions about their investments in the Chinese consumer stock market.