Michael Burry doubled down on China bets. Here’s what other investors are saying

Burry’s investment moves are widely followed as he correctly called the collapse of the U.S. housing market that triggered the 2008 financial crisis. He shot to fame after appearing in Michael Lewis’s book “The Big Short,” that was later a movie.

The filing with the Securities and Exchange Commission, known as a 13F, revealed Scion had 10% of his U.S.-listed portfolio in China retailing giant JD.com
JD,
-1.53%
and 9.6% in e-commerce giant Alibaba
BABA,
+2.16%
at the end of the first quarter. Scion was also a buyer of those names in the fourth quarter of 2022, but as the holdings information is backward looking, it’s unclear if the fund remains invested.

Burry hasn’t responded to a request for comment from MarketWatch.

Scion wasn’t alone in that China enthusiasm, though. Hedge fund Third Point also took a new position in Alibaba, and hedge fund Hillhouse Capital Advisors, filing under HHLR Advisors, added to its position in Alibaba, PDD Holdings and other China names.

Investors have been riding out a not-so-easy year for China stocks. U.S.-listed shares of JD.com are down 32% year to date, while Alibaba, which will report its latest results on Thursday, has eked out a 0.28% gain, after dropping more than 20% in 2022.

Online retailer PDD
PDD,
+0.67%
is off 18%, with EV maker NIO
NIO,
+1.52%
down 15%, while online internet tech group NetEase
NTES,
-1.64%
is up 23%. Reporting Tuesday, Chinese search engine operator Baidu 
BIDU,
-1.63%
got a boost after beating forecasts and swinging to a first-quarter profit.

Some of the wobbles for China stocks are down to uncertainty over how long the country will take to emerge fully from its zero-COVID policy. Data out Tuesday showed disappointing growth in China retail sales and industrial production, and a youth unemployment rate at a record 20.4%.

Among those not ready to give up on China is Thomas Hayes, chairman of hedge fund Great Hill Capital. He has owned Alibaba for over a year and says right now is an “opportunity to buy and an opportunity to hold. I think we’re in the final stages of the shakeout that’s been going on for the last year.”

“There’s not a business globally of its scale,” Hayes says of Alibaba in a telephone interview with MarketWatch. And that’s as shares are also trading at deep discount to intrinsic value — if the business had to be liquidated. He sees big benefits from IPOs Alibaba’s management is planning for many different units.

For instance, Alibaba could deliver China’s next Costco
COST,
-0.23%,
with its Freshippo grocery business, where an IPO worth $10 billion is being planned, says Hayes. Then there’s the global e-commerce business Lazada and AliExpress, with plans for an IPO of $39 billion, and all that all before touching on potential for Alibaba’s cloud unit, which Hayes is most excited about. He refers to a report by global management consultant McKinsey that has predicted the China cloud business will triple by 2025.

Adding all this up, he said “you’ve got a business that would be hard to replicate for less than $1 trillion. And it’s trading at a couple of hundred billion dollars in the markets right now.” For now, the problem is some despondency toward Chinese stocks, that’s partially justified due to “mercurial government leadership behavior,” which is changing.

The government now wants to drive domestic spending and Alibaba is well placed for that, said Hayes, who thinks that in two to three years, the stock could double. He owns both the ADR and Hong Kong-listed shares.

KraneShares, an exchange-traded fund provider that focuses on Chinese listed companies, holds Alibaba, Baidu and other big-name Chinese stocks in the KraneShares CSI China Internet ETF
KWEB,
-0.14%.
The fund is “highly geared to domestic consumption in the country,” KraneShares chief investment officer Brendan Ahern, told MarketWatch. (KraneShares is majority owned by China International Capital Corporation.)

‘Not like flicking a switch’

“Broadly speaking what’s happening, China in this post-zero COVID world is having this incremental economic recovery. It’s not like flicking a switch where all of a sudden everyone is back at it. Your consumer confidence has to grow, you know, people have to see the economy is improving, and our thesis has been that Q1 will be better than Q4, Q2 will be better than Q1,” Ahern told MarketWatch.

From excitement around the reopening last year, China faded from the spotlight for investors, partly owing to a U.S. banking crisis. In a note to clients earlier in May, JPMorgan acknowledged that the country’s COVID consumption recovery has thus far lagged behind that of other major economies.

“This has led to more subdued growth expectations regarding earnings and reduced positioning in cyclical bets in favor of thematic bets,” wrote the bank’s China equity strategist Wendy Liu.

But like others, she appealed for patience, noting that China consumer confidence tends to lag business confidence by about six months. “Given that business confidence first improved in November 2022, assuming a 9-10-month lag, late 3Q/4Q 2023 is when we may see better data, all else being equal,” said Liu.

Creating more buzz around investing in China was a recent Economist magazine cover, which discussed slowing growth, though based on the magazine-cover theory, could be seen by some as a contrarian indicator.

Hedge-fund manager Hayes is also sanguine about China’s progress. “You’ve got to give the patient a little time to heal. What happened in China over the last three years was completely devastating,” he said.

As for Alibaba, he has a pretty good idea of the path forward for the company he views as an early Amazon.com
AMZN,
+1.85%.
He says Alibaba’s cloud business is at the spot that Amazon Web Services was in 2016 in terms of revenues and low margins.

“I can assure you when this stock is over $200, everyone, all the pessimists who said it was not investible at $80 are going to be saying, ‘This is the future, a billion people [in China], the cloud is just getting started,’” said Hayes.