A hands-off approach to business from the Chinese government could have Amazon “quaking in its boots” according to Allianz Global Investors’ Walter Price, who says the international expansion plans of Alibaba and Tencent are being hampered by premier Xi Jinping’s power-grab.
While another technology enthusiast, James Anderson of the Scottish Mortgage Investment Trust, said the fate of the global economy rests with innovators based in the west coast of the US and the east coast of China, Price is largely ignoring the latter group, with just 1.2 per cent of his Allianz Technology Trust in the Far East & Pacific as a whole.
Source: Allianz
The manager blamed this on an uncomfortable environment for shareholders.
“You look at Alibaba and you look at Facebook, Facebook is generating $15bn in cash, the cash is in the bank in the US and it recently committed to aggressively buy its stock back,” he explained
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“It bought back billions of dollars in stock in the last quarter.
“Alibaba is a wonderful business with very high margins, but while the cash is generated in China, the stock is listed in the US. Can it get the money out of China to buy its stock back or pay a dividend? Not really.”
Price (pictured) has not always been this sceptical towards China and as little as three years ago it accounted for 15 per cent of his portfolio. The manager even went as far as to describe Alibaba and Tencent as among “the world’s great companies”.
However, he said that Xi’s reforms last year, which saw him scrap the two-term limit for presidents and vice-presidents and reshape the government’s entire power structure around his own priorities, have given him serious concerns about the future for the corporate environment.
For anyone who thinks he is being overly pessimistic, Price pointed out he is not the only one who is worried, citing Alibaba founder Jack Ma’s decision to leave the company and return to teaching.
“Why did Jack Ma retire? It is because five of the top-10 people in China two years ago were in jail,” he continued.
“You could say they did something illegal. But having invested in China since 2002, I have seen everybody was doing things that were illegal. The way to get things done was to do whatever you had to do. There was law and there was a way that business was done.”
Price said the real reason the government is changing its view towards the super-rich is that with economic growth slowing, it needs more cash.
“The attitude is, ‘you benefitted from our economy and our people, so it is our money’,” he added.
“That’s the thing that worries me. It’s not written down anywhere but that is the concern I have, that the Chinese government looks at every pot of money in China, and if the economy gets difficult, that money does not belong to me as an investor in Alibaba or an investor in Tencent. I could wake up tomorrow and they could have claimed it.”
However, Price believes this is a self-defeating strategy from the Chinese government, pointing out that the more it interferes with its tech behemoths, the less of a threat the country will pose to the US and other developed economies over the long term.
The manager used Huawei as an example of what can happen when state interference is kept to a minimum. Price said it is “scary how good they are” adding that he only became aware of the company’s dominance after attending the Mobile World Conference five years ago.
“At that time I was an investor in Ericsson and I walked around and Ericsson, Qualcomm and Nokia all had these booths,” he recalled.
“And then Huawei had a whole building. I said I am not investing in this area because we can’t invest in Huawei, it is a private company, and these guys are going to win.
“I think why it’s been successful is because basically they [the Chinese government] let it do its thing. They let Alibaba do its thing, Tencent do its thing and now many of these companies are going from their space in China just like Huawei did and they are starting to figure out how to be successful outside of China.
“If they are left to do that in an unfettered way, they are very relentless and they have a lot of young people they can marshal and that work hard, so I think they are a major force for the western companies.”
However, he said that at this moment in time, these companies are too preoccupied with what is going on in China to continue their international expansion.
Price is optimistic though and said that if the government in Beijing realises it has gone too far and takes a step back, rather than making up 15 per cent of his portfolio as before, he believes Chinese companies could in theory account for five of his top-10 holdings over the next decade.
“They would have made that transition to become global powerful companies that are world class,” he finished. “Just like retailers are quaking in their boots, maybe Amazon will be quaking in its boots because they are learning from Amazon as fast as Amazon. Amazon went head to head with Chinese companies before and it didn’t win.”
Data from FE Analytics shows Allianz Technology Trust has made 554.1 per cent since Price took charge at the start of May 2007, compared with gains of 305.46 per cent from its IT Tech, Media & Telecomm sector.
Performance of trust vs sector under manager tenure
Source: FE Analytics
It is on a premium of 0.52 per cent compared with discounts of 0.16 per cent and 3.69 from its one- and three-year averages.
The trust has an ongoing charges figure of 1.02 per cent and is not currently geared.