The Chinese authorities were no doubt frightened by the collapse of Chinese stocks traded in the US and Hong Kong, which within days lost hundreds of billions of dollars in value. The sharpest of them since the 2008 financial crisis.
To stop the drift, China entered a state of damage control. At a hastily convened meeting on Wednesday, Chinese Securities Authority Deputy Chairman Fang Shanghai told representatives of banks and international investment bodies such as Goldman Sachs and UBS that regulators will now consider the impact on the capital market before introducing future policies to prevent volatility and give more time Investors digest new moves. Fang also made it clear that China has no intention of harming other industries beyond those already in focus.
At the same time the official financial press has embarked on an extensive publicity stunt with a series of commentary columns designed to calm the winds. According to interpretations, foreign investors have nothing to fear from investing in Chinese companies. “Short-term volatility does not change the long-term positive outlook for China-traded stocks,” the Securities Times reported. “The recent decline in the market reflects to some extent a misinterpretation of the policy and an emotional outlet. The economic base has not changed and the market will balance out at any moment.”
But in light of the turbulent week full of losses to Chinese stock investors, is it worthwhile and worthwhile to believe the intense calming messages coming from Beijing? Not sure.
The party is the boss
In recent months Chinese companies and sometimes entire sectors have been going through one after another regulatory attacks from the Chinese authorities. At first it was Jack Ma’s fintech giant Jack Ma, whose giant offering was canceled days before it was due to go live. Then there was travel booking company Didi Chushing, the Chinese equivalent of Uber, days after it was issued on Wall Street the Chinese authorities opened an investigation against it for information management and blocked the downloads of its apps. Eventually came private education companies, some of which are traded in the U.S., that were banned from opening new learning centers or running private lessons on school material on weekends and holidays.
There are many reasons behind all of these aggressive measures, some more visible and some less so. There is a significant element here of a desire to show the powerful bosses of technology companies that the ruling Communist Party is the real boss. There is also a desire to correct anti-competitive distortions in the market that have given too much power to some companies at the expense of others.
With some of the Chinese steps one can even agree. One of the last regulatory requirements was from food delivery companies to ensure a minimum wage for couriers, a goal that is hard not to identify with. The steps against education companies are also understandable when looking at the mental burden placed on Chinese children, who are required to attend long classes on weekends to ensure that they do not lag behind their peers in those classes. The extra classes on weekends and vacations also place a heavy financial burden on parents and create inequality between those who can fund them and those who cannot.
Back to the socialist tradition
But even if one agrees with some of the steps, it is impossible to forget that all of these are happening in the context of a broader and more significant change taking place in China. For decades, since China opened to the world in the late 1970s, entrepreneurs and private businesses have been given extensive freedom of action to promote their activities and generate profit. The perception was that as long as these did not interfere in politics and did not challenge communist rule, they could operate in a relatively free and capitalist market, which would create prosperity for all.
Since President Xi Jinping came to power in 2012, he has reiterated his commitment to return to the socialist tradition and put the state and the party, and their goals, above all else. As a result, Chinese companies today are required to align completely with the goals of the government and those who do not do so will suffer a severe attack. But that’s not the end of it. Today’s China no longer trusts the free market but strengthens government involvement in guiding the economy and society. In general, when China wants to promote certain goals, such as raising the low birth rate, it is willing to run over everything that is perceived as disruptive, such as high spending on private education.
In recent days, China has realized that it has gone too far and frightened the markets in a way that has hurt it, but its broad perception that it is the one that should steer the direction in which the industry will go, not the entrepreneurs and the free market, has not changed. Veteran Chinese commentator Bill Bishop amusedly defined the Chinese sedative messages of recent days: “China’s general message sounds something like ‘We intend to destroy only one industry at a given time'”.
Increase in risks
Foreign investors have been flocking to the Chinese market since it opened to the world and this has indeed provided them with considerable profits over the years. Foreign investment funds like the Japanese softbank have built their reputation for identifying opportunities in China, like the early identification of young startup Alibaba, which has yielded huge returns. Institutional and private investors have also posted good returns on investing in emerging Chinese stocks.
Investment in China has always been risk-averse. Chinese companies have often been found to be a source of fraud, which shortlisted funds have made a living from identifying and reporting. At the same time the Chinese government was known for its volatile and unpredictable policies, such as announcing one bright day that the launch of new video games in the local market for educational reasons, which crushed shares in the field, led by giant Tencent.
But in the current situation investing in the Chinese market is becoming much more risky than in the past. Despite current calming messages, the Chinese government will continue to prioritize its goals and objectives over the interests of foreign investors. Such goals can be as exotic as smashing companies traded overseas to get their shares traded at home and cost as much as it will cost all of it to foreign investors.
In the past week, amid market upheavals, there have been investors like investment guru Kathy Wood from the ARK fund, who have announced that they are selling their holdings in Chinese technology stocks. It is estimated, however, that most foreign investors will continue to try to go between the drops, continuing to invest in China through sectors that are less likely to be affected by regulation, such as the chip industry. Even if last week sent a clear message about the risks of investing in stocks in China, the chances of profiting from a developing market are still great and still attractive. “While it will take some time for investors to come back, in the end greed often outweighs fear,” Bishop estimated.
The impact of recent regulatory measures
● Maitouan shares fell 15%
● Notice that food delivery companies must pay a minimum wage to couriers
● Didi stock lost half a campaign
● An information security investigation was opened against it and some of the applications were blocked
● Tencent was cut by $ 100 billion
● Blocked attempt to purchase competing streaming service
● Private education companies have plummeted
● New laws prohibit private lessons on vacations and weekends