In light of Xi Jinping tightening his control over China’s economy, investing in Chinese stocks is risky. One never knows where or how Beijing will involve itself in the economy, but government intervention is inevitable and unopposable.
Investment guru Jim Cramer said that the Chinese Communist Party (CCP) is a “wild card.” He told CNBC’s Squawk Box in an interview on Jan. 5 that the uncertainty is too high for U.S. investors to continue to invest in China.
“Xi has complete contempt for us, complete contempt for shareholders, and very contemptuous of rich people whom he thinks threaten his power,” Cramer said.
The “bond king” and DoubleLine founder Jeffrey Gundlach calls China “uninvestable” because he does not trust the CCP’s data. He told Yahoo Finance on Jan. 5 that given the animosity between the United States and China, he fears that China investment assets could be confiscated.
Furthermore, the CCP’s tech crackdown has already spooked investors in that sector, with giant Chinese tech companies feeling the heat. Alibaba lost 45 percent of its value in the last 12 months, while Tencent lost 40 percent. Chinese ride-hailing app Didi is planning to delist from the New York Stock Exchange due to pressure from the CCP. Now, there are no Chinese companies left among the world’s 10 largest firms.
The after-school tutoring industry has also been effectively wiped out by Xi’s edicts, preventing them from hiring foreign teachers and earning profits. Consequently, shares of the multibillion-dollar TAL Education Group lost 95 percent of their value. Two other leading firms in China’s tutoring industry—Gaotu and New Oriental—experienced similar losses. The country’s three largest education sector entrepreneurs lost a combined total of $27 billion of their net worth.
Under the new regulations, the tutoring sector is also prohibited from doing initial public offerings (IPOs). But even if the IPOs were allowed, it seems unlikely that investors would put their money into firms that are barred from earning a profit.
The Chinese stock market reflects the general loss of confidence in the economy. In 2021, the Golden Dragon Index, which tracks mid- and large-cap Chinese stocks, plummeted by roughly 49 percent. The Hang Seng Index declined by roughly 15 percent, wiping about $600 billion in market capitalization.
In the United States, Chinese stocks lost approximately $1 trillion in value over fears of delisting.
A girl carrying a schoolbag stands near an outlet of private educational services provider New Oriental Education and Technology Group in Beijing, China, on July 26, 2021. (Tingshu Wang/Reuters)
The U.S. Securities and Exchange Commission (SEC) said in July 2021 that it will no longer process IPO listings for Chinese companies that fail to meet transparency requirements. Consequently, the Chinese listings and IPOs are being shifted to Hong Kong.
As a result of increasing uncertainty in China, some fund managers are considering removing Chinese investments from their emerging markets portfolios.
Regina Chi, vice president and portfolio manager at AGF Investments, said in a recent commentary that the MSCI China Index, which monitors large and mid cap stocks, had declined by 14 percent for the year 2021 up to Oct. 31, while other emerging markets were up. For example, MSCI India increased by 25 percent and MSCI Argentina increased by 34 percent over the same period. Chi blames the CCP’s hardline on economic issues. She said that by selling off China assets, cash could be reallocated into other economies that are performing better.
Last year’s tight economic controls caused a rise in defaults, increased market risk aversion, as well as increased risk of defaults, according to Chi Lo, senior market strategist at BNP Paribas. He predicts that maintaining economic growth will be a priority for the CCP this year. The proceeds from last year’s local government bond quotas will be used to expand the economy. That means that reducing debt, stabilizing the economy, and hitting pollution targets will all take a backseat.
Last year, COVID-19 restrictions in the rest of the world made it difficult to manufacture products locally, which increased China’s exports. This year, the situation is reversed. As other countries allow their factories to get back to work, demand for Chinese products will decrease.
Meanwhile, the CCP’s strict “zero-COVID” policy is hamstringing China’s manufacturing sector. Constant interruptions and repeated factory and shipping closures are going to eat into China’s GDP. As consumers in other countries complain about supply chain disruptions and shortages of goods, local manufacturers will begin picking up the slack.
Many of the world’s leading financial institutions anticipate weak GDP growth in China. BNP Paribas and DWS see China struggling to hit 5.3 percent growth in 2022. HSBC predicts China’s growth will be at 5 percent or below. Bank of America is expecting China to be an outlier, with slower growth than other countries. Credit Suisse’s forecast is for an economic slowdown in China. And HSBC Asset Management says that the world could experience a negative shock caused by a COVID-19 resurgence or a hard landing in China. And China’s hard landing could easily come from its COVID lockdown regimen.
The “zero-COVID” policy is just one more example of the draconian control the CCP has over the economy. The stroke of a pen can force Chinese companies to delist from foreign exchanges. A government whim can decimate an entire industry, like private tutoring or big tech. And Beijing’s insistence on “zero COVID” can shut down factories and seaports, accelerating the shift of global supply chains away from China.
In short, the fluctuations of Chinese stocks, as well as the ups and downs of the general economy, are not predicated on free market forces but rather on CCP mandates. This suggests that China is not a market economy. Additionally, the risks of investing in China are neither predictable nor calculable because they are predicated on decisions taken by the CCP.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo, PhD, is a China economic analyst who has spent more than 20 years in Asia. Mr. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).
