Over the past three months, chinese stocks have fallen over and over again, many investors have taken advantage of these discounted prices for long-term gains. On the other side of the spectrum. Many investors believe that there's too much risk surrounding china. Kathy wood is in the middle of the spectrum, as she initially sold her chinese stocks, but recently bought back in with a very unique strategy.

This video will go in depth on the future of chinese stocks and explain both sides of the debate on china. Chinese stocks have fallen by a substantial amount for a good reason. New regulations have been enforced on education, gaming data, privacy, monopolies, exclusive contracts and u.s ipos. The fact that all of this has happened over just several months is frightening.

For many investors, the chinese communist party can easily ruin chinese equities with the snap of a finger. Chamath polyhapathia, a billionaire venture, capitalist and spax sponsor believes that the risk surrounding chinese assets is far too high to be worth it. Chamath is particularly concerned with the variable interest entity or vie structure that chinese companies used to go public on the u.s stock exchange. So what exactly is a vie structure? I've seen many people talk about vies, but never explain the risks of investing in them and how it works.

It is currently illegal for foreign investors to invest in most chinese industries. As a result, chinese companies have used vies as a loophole for this restriction. In the following example, we will use alibaba to demonstrate how a vie works. Alibaba operates in an industry that is restricted from having foreign investors.

In other words, foreign investors cannot directly own equity. In alibaba, as a result, alibaba has to create a shell company in the cayman islands also called alibaba for the purpose of this example. We will call this shell company fake baba, note that in the real world, fake baba is actually named alibaba after creating fake baba. Alibaba will now give fake baba contractual agreements over alibaba's profits and assets.

This is done through a complicated legal process. The contractual agreements owned by fake baba gave it control over alibaba's loans, exclusive call options, proxies and equity pledges, essentially, fake baba owns contracts for alibaba's profits and assets, but doesn't actually own. The equity alibaba will now take fake baba public on the new york stock exchange. So that u.s investors can invest in fake baba by using this process, alibaba is able to bypass chinese laws against foreign ownership.

Alibaba isn't actually going public on the us talk exchange because fake baba is the one going public on the other side of the transaction. U.S investors do not directly own equity in alibaba, u.s investors only own equity in fake baba. This type of structure is famously known as the variable interest entity, structure or vie structure. In short form.

The majority of chinese companies use the vie structure to go public on the u.s stock exchange. Vies have worked well for many years, but there are some major concerns with the structure. First of all, the vie structure is technically illegal, as it is just a loophole so that foreign investors can own equity in china because of that, china may declare that vies are illegal at any time. Chemath believes that investing in china is a risk not worth taking, and this is because of the vie structure.

We are now in a situation now where the chinese government basically says for online tutoring we're going to cancel the vis in a bunch of other areas, we're going to start with regulation. We could cancel the vis later and so we've essentially put the capital markets. In my opinion, on pause, and so now, let's transition to this other part, it's in china, capital markets in china. I think now are the most volatile.

They've ever been essentially the people's republic of china, the government, the ccp, chooses how and who will make money on the other side of the spectrum. Many investors believe that the potential returns in china stocks outweigh the risks. What's interesting to see is that many value in growth investors see potential in china, kathy wood, the ceo and ceo of arc invest recently re-entered their chinese positions after selling them a few months ago. This was shocking for many investors who have been following kathy, especially because kathy previously said that china's new regulations were destroying capitalistic incentives.

Nevertheless, she is now approaching the situation in a very unique way. Instead of investing in all chinese stocks that have disrupted potential, she is now investing in chinese companies that have government support. More specifically, kathy has been buying jd.com and pin duo duo, while selling alibaba and baidu the ccp's new policies were heavily against alibaba, which indirectly benefits jd and pin dual duo. In fact, in jd's recent quarterly conference call jd retail ceo shu lei took a jab at alibaba.

Shu lei explains that china's new rules are aimed to regulate misconduct such as disorderly capital, expansion and monopolistic contacts. These goals are conducive to jd's, long-term business growth. Shu lay statement hinted at alibaba's record anti-trust fine of 2.8 billion dollars. This fine was given after regulators found out that alibaba was signing exclusive contracts with brands that barred them from selling products on jd.

That record fine, along with jack, moss disappearance and ant's ipo, being cancelled, directly go against alibaba. As a result of this kathy wood is only investing in chinese stocks that are on the government side. Our flagship fund has moved out of most chinese stocks. I think we were out probably late april late may somewhere around there.

It might have been a little bit later. You never know 100 of the time. I think the online education really nationalization. There was a a real valuation killer for the market.

So i think that the market's going to be under pressure from a valuation point of view for a long time now, because that that sort of thing was so unexpected. Even from those of us who saw the the government tightening its grip on the country. But what we have done, we did after this last bloodbath in the stocks we did try and sort through okay, which companies are doing things the government like right and what we're seeing those that are catering to tier three tier four cities, logistics, groceries, so you've seen Us by jd.com jd logistics is a big part of jd.com. I think they own 70 of it, so that's probably been our biggest purchase as well as some pin duo do for the same reason.

But if you were to look at what we were doing in those portfolios, we were really swapping them out of other names that we think are going to be continue to be in harm's way, or certainly under government pressure. Like the alibaba's, for example, kathy wood is only buying chinese companies that have government support, but many value investors are doing the opposite. One website names, data roma tracks, the holdings of all super investors, including charlie munger, bill gates, bill ackman, manish, prabhai, and many more. These investors have beaten the market over the long term and are usually worth looking at in the second quarter of 2021 alibaba ranked as the number one buy for all super investors.

The super investors who purchased alibaba include monies for guys fire and bill miller, all of whom were successful. Long-Term investors in the first quarter of 2021, charlie munger warren buffett's right-hand man also purchased alibaba's stock, which is surprising, given that he has publicly spoken against the vie structure, so why are munger and many others still buying alibaba, despite the risks surrounding the vie structure? I recently spoke with one investor who obtained some information from charles schwab, which is a well-known stock broker. A charles schwab employee told the investor that if china delists chinese stocks, investors in china won't actually lose all of their money. First of all, in the case of a delisting chinese stock investors would still keep their holdings in chinese stocks.

The only problem is that those investors will have to find a place to trade them, given that the vie contracts would still theoretically have value, investors would be able to trade their chinese stocks over the counter or swap their shares for hong kong shares. One share of alibaba in the u.s can be traded for eight shares of alibaba and hong kong. Therefore, if alibaba gets delisted in the u.s, charles schwab would help its clients transfer their alibaba shares to hong kong shares where they would still have some value. The second option would be to trade those alibaba shares over the counter in the u.s either way.

Those alibaba shares would still have value, keep in mind that this isn't the worst case scenario of chinese stocks being delisted. Many investors believe that the nuclear option of a d-listing won't ever happen. This is because, if china does delist chinese stocks, that would start world war 3. and if world war 3 starts, you should be more worried about surviving and your portfolio as a whole.

Aside from the delisting risk, a lot of chinese companies are fundamentally strong. Monish prabhai, a hedge fund manager, who reportedly averaged a return of 25.7 per year over 18 years, believes that alibaba's fundamentals are stronger than the big tech in the u.s. Manisha has allocated over 20 of his portfolio to alibaba, so this is definitely a huge investment for him. What's your overall thesis with baba, it's an incredible business.

If you look at baba and tencent - and you know where they're at and uh the ecosystem and the mood and what they control - and you know all of that - it's and you know look at the tailwinds from china. I mean there's, there's a lot to me to like even more than the large u.s tech uh, just because i think that the tailwinds are so much stronger and uh. There's some serious barriers to entry. Alibaba's business fundamentals are incredible and it's actually trading at an extremely low price at the time that i'm recording this video alibaba is trading at a pde ratio of 21.

that is astonishingly low, especially when you consider that alibaba is expected to grow its revenue by 20. To 30 percent per year over the next few years for context, amazon is trading at a pde of 60, although amazon does deserve a slightly higher premium. Alibaba spends roughly 7 percent of its revenue in capital, expenditures or capex in short form. On the other hand, amazon spends 11 percent of its revenue on capex, so it does deserve a higher pde ratio, but definitely not three times higher than alibaba.

With that being said, there are some serious risks to investing in chinese stocks. Nobody knows what regulations are coming, except for the chinese government itself. Charlie munger believes that china has no incentive to destroy its own businesses, so any regulations likely won't impact the fundamentals of chinese companies by a significant amount. Monger has put his money where his mouth is and has allocated roughly 17 of his portfolio to alibaba they've lifted 800 million people out of poverty fast.

There was never anything like in the history of the world, so my hat is off to the chinese and i think they will continue to allow people to make money. They've learned it works the chinese. I love what the guy said in the first place. I don't care whether the cat is black and white as long as it catches mice, that's my kind of talk.

If you're comfortable with the risk of investing in china, chinese stocks could provide massive returns. Chinese stocks are trading at a massive discount right now and while this discount is partially warranted, it is likely an overreaction one way to mitigate the risk of chinese stocks. Being delisted is to invest in hong kong shares instead of u.s shares. The best way to invest overseas is by using interactive brokers, the top stock broker for investing internationally.

I've personally looked to plenty of brokerage firms, and i found interactive brokers to be the most superior broker for investing internationally by using interactive brokers, you can purchase alibaba's hong kong shares, which likely won't get delisted if you're interested or just curious check out the first link Down below to open an account, i'm not sponsored by interactive brokers, but the link down below is an affiliate link. Thank you for watching. As always and i'll see you in the next one.