The share prices of Didi (NYSE: DIDI) and NIO (NYSE: NIO) fell sharply last week.
It all started when Chinese regulators forced Didi to remove its app from the country’s app stores. This was unexpected because the company only went public a few days before.
The move appeared to catch many investors by surprise. Before the IPO, it did not appear as if there was any chance of this happening.
After this development, Chinese regulators announced that they would be taking a harder line with Chinese companies that decided to go public in New York. Analysts believe this could disrupt the $2trn market for Chinese listings in the US. Regulators could even go further by attacking so-called variable interest entities (VIEs).
Many Chinese companies use VIEs to circumnavigate the country’s rules on capital flows.
Didi stock risks
At the time of writing, there has been no mention of this actually happening. It is only speculation at this stage. However, all of the above has severely affected investor sentiment towards Didi and NIO shares.
Both of these companies have made significant progress in their respective markets over the past few years. The question is, would I invest in either stock at current levels?
The answer to this question is not straightforward. While I think the Chinese economy could be set for many years of growth as the region’s middle class continues to grow and acquire wealth, I am also wary of investing in the region.
Chinese regulators can be unpredictable, and outside investors are often left out in the cold. There is very little investors can do to recoup money from a fraudulent or failing Chinese business.
That being said, there is no denying that the Chinese market for both Didi and NIO products and services is tremendous. Both companies could report rapid sales and earnings growth in the years ahead if they manage to capitalise on the region’s economic prosperity.
An alternative to NIO shares
Still, they are not the only stocks available for investors to buy to invest in China. They are also not the only companies in their respective sectors.
For example, the global ride-hailing market, which Uber has a near-monopoly on in Europe and the US, is still growing. Didi stock offers an opportunity to invest in the Chinese ride-hailing market, but it is not the only company in the world.
The same is true of NIO shares. The company is rapidly scaling up its electric vehicle production, and it is one of China’s largest electric vehicle manufacturers.
Nevertheless, it is not the only firm in the world producing electric vehicles. I think Tesla could be a better investment as it already has an established global network, and its brand is far better known in western markets.
Therefore, I would avoid both Didi stock and NIO shares. I would buy their Western competitors, Uber and Tesla, instead if I wanted to acquire exposure to the ride-hailing and electric vehicle markets.
