Short-selling guru Carson Block has warned that Chinese shares are ‘uninvestible’ following the disappearance of billionaire Alibaba founder Jack Ma.
Block, one of the world’s best-known activist investors, said Ma’s disappearance is ‘just one of the reasons’ he is betting against Chinese firms.
He said his main concern is dodgy accounting practices, but he also hit out at poor oversight of the way companies are run and the huge power of the Chinese regime over the country’s firms.
Shares in Alibaba – China’s answer to shopping giant Amazon and one of the world’s biggest companies – have fallen by around 25 per cent since October, when founder Ma made critical comments about China’s regulator and state-owned banks.
Weeks later, the flotation of Ma’s financial services firm Ant Group was cancelled by the Chinese authorities, just days before it was due to list. Beijing’s competition regulators then launched an investigation into Alibaba, in which Ma still holds a 5 per cent stake, sparking the share price fall.
Ma, a former English teacher who became the international poster boy for Chinese e-commerce, has made no public appearances since his comments in October.
Block told The Mail on Sunday: ‘Jack Ma’s inability to be seen in public is just one of the reasons why we believe China equities are uninvestible.
‘I’m of the view many of the companies from China that are publicly traded in the US are committing accounting fraud to some extent, overstating profits, often revenue, and cash. The first risk is you’re investing in bulls*** numbers.’ Block, who runs activist fund Muddy Waters, has a stellar reputation for taking bold bets against companies and his comments put him at odds with major UK asset managers – including FTSE100 giant Scottish Mortgage Investment Trust, which owns a major stake in Alibaba.
Short-sellers such as Block bet against companies by borrowing their shares from other investors, selling them and hoping to buy them back when the price falls. They then pocket the difference and return the shares to the original owner.
Block’s big successes include bets against former FTSE100 company NMC Health, where he raised concerns over hidden debts and murky financial statements. He has also ‘shorted’ Burford Capital, a litigation funder listed in London, prompting a corporate shake-up.
Speculation about Ma’s whereabouts was triggered by a failure to appear on the finale of an African TV show he created. Filming was conducted in November and Ma’s picture has been removed from the Africa’s Business Heroes website.
Reports last week claimed Ma is not missing, but lying low. Beijing has ordered Chinese media to censor coverage of the Alibaba probe.
Block said there were red flags around Alibaba long before Ma’s disappearance. The company listed in 2014 in the world’s largest stock market flotation at the time, raising $25billion. Block said: ‘In 2011, Alibaba was still private. The largest outside shareholders were SoftBank and Yahoo. And Jack Ma just took, without telling anybody, Alipay, and he transferred legal ownership of [payments specialist] Alipay from Alibaba to himself.
‘So I was face-palming [in dismay] repeatedly in 2014 when Alibaba went public, and everybody was just eager to get it.’
The feared short-seller is now betting against Chinese companies including GSX Techedu, a Chinese after-school tutoring platform.
News of Ma’s disappearance has coincided with the arrest of more than 50 of Hong Kong’s most prominent pro-democracy activists and politicians following the introduction of new security laws by China.
Tom Tugendhat, chair of the China Research Group of MPs, said: ‘The lesson from Beijing in recent days is clear – there’s no protection for those who criticise the leadership or challenge the party.
‘Even national heroes like Jack Ma can be silenced and elected officials in Hong Kong arrested. Everything, from business to freedom, is on a temporary loan from the Chinese Communist Party and can be taken away any moment.’
Block said he feared even major stock market listed Chinese companies were ‘working hand in glove with the Chinese government and their military industrial complex’. Analysis by Citywire for the MoS showed Scottish Mortgage Investment Trust, the Federated Hermes Global Emerging Markets fund and a State Street Global Advisors fund were among the UK entities with the most valuable stakes in Alibaba.
Frank Talbot, head of investment research at Citywire, said: ‘A lot of funds have made a fortune on Alibaba over the years. Even with the recent fall, the stock is still up nearly 250 per cent since it listed in 2014.
‘Scottish Mortgage, which owns the largest chunk of the company in the UK, held it before the listing and has made more than 1,000 per cent on it. Still, the situation is certainly worrying, particularly given the uncertainty over how far the Chinese government will go to punish Ma and his business empire. However, Chinese firms and tech stocks are prone to volatility and drawdowns like this, which can be fleeting and reversed into large gains.’
Hugh Young, head of Asia Pacific for Standard Life Aberdeen (SLA), said: ‘I think the Alibaba case simply highlights what we’ve known all along, but chose to forget or at the very least to put at the back of the mind – the supremacy of the party. I’m afraid with any equity investment anywhere in the world it should be buyer beware.’
However, Young said there was still ‘tremendous growth’ to be found in China and SLA does not intend to change its approach to investing there. He said markets in China had performed ‘extremely well’ but were ‘due for a breather’.