Carson Block, the chief investment officer of Muddy Waters Capital LLC, is concerned that people investing in Chinese assets are not accounting for the market risks associated with how quickly the Chinese government makes decisions regarding its domestic companies.
“I think investors for the past decade were basically pulling the wool over their own eyes on the capriciousness of the policy environment in China. So that’s coming home now to bite a number of investors. But it’s just one of many risks that you really need to take into account but investors have not,” Block said in an interview with Bloomberg TV.
For these reasons, a China stock “should not trade at a significant discount relative to a stock of a company that’s based in the U.S.” provided that all other things are equal. “But often we’ve found that they don’t, because investors like to tell themselves these fairy tales about it,” he added.
In China, regulatory crackdowns on companies have intensified in recent weeks. The sectors range from transportation and logistics, education technology, delivery services industries, and so on. Chinese regulatory bodies launched a data security review against Didi, a ride-hailing company right after its shares began trading in the U.S. on June 30.
Beijing is looking to rein in private companies which it blames for increasing inequality, spiking up financial risk, and defying the authority of the government. The action against private enterprises has triggered a wipe-out of around $1 trillion worth of share value listed on the mainland, Hong Kong, and the U.S. stock exchanges since February this year. The chaos caused by Beijing’s crackdown has raised concerns over whether Chinese stocks are still worth investing in.
In his interview, Block pointed out that American investors don’t fully appreciate the fact that Chinese economic data is not “real data” since there is “inaccuracy and then lying” embedded into it. Yet, investors insist that they need exposure to China’s growth potential.
Block noted that investors are currently operating in a world of low-interest rates and financial repression due to which they are shifting more money into higher-risk investments like the equity markets. He has been short on Chinese stocks for years. Muddy Waters is presently market neutral, meaning that its short positions are balanced out by long positions.
Muddy Waters conducts extensive due diligence-based investment research on companies all over the world. In 2011, Bloomberg Markets Magazine named Block among the “50 Most Influential in Global Finance.”