It said a lot about the evolution of the global economy and capital markets when Chinese shares were the biggest story at the beginning of a week that featured mega-cap US tech earnings, top-tier US economic data and a Fed meeting.
Some of the largest US-listed Chinese firms took a severe beating following the latest iteration(s) of Beijing’s ongoing regulatory crackdown.
Xi zeroed in on the education technology sector over the weekend with a sweeping decree that many suggested was a death knell for the $100 billion industry.
Read more: Beijing Teaches ‘Mr. Market’ A Lesson. But You Folks Will Never Learn
Losses for TAL Education, New Oriental and Gaotu Techedu were devastating. The figure (below) is scarcely worth highlighting — I’m sure the sight of it feels gratuitous to investors.
“These regulatory developments are not totally out of the blue,” JonesTrading’s Mike O’Rourke noted, flagging TAL’s Form 20-F SEC filings which, over the past three years, listed the draft rules under its “Risks Related to our Corporate Structure.” “Going forward, investors will more heavily scrutinize the risk factors in SEC filings of US-listed Chinese companies,” he added, in a note.
Here’s hoping, Mike. But Americans aren’t exactly known for reading the fine print — not on their investments and not on anything else, for that matter. O’Rourke told Bloomberg that regulatory ambiguity around Chinese firms “is something that’s impossible for investors to quantify.” That was my general message (see the first linked article above), although I was a bit more caustic in my delivery.
Nomura’s Charlie McElligott wrote that further tightening measures from authorities in the property sector “alongside stern language from the Chinese towards their US counterparts at the start of a new round of diplomatic talks” are perhaps equally important when it comes to assessing whether the risk-off mood and “panic selling” (as one market participant put it) persists in Chinese shares. He quoted colleague Ting Lu:
The PBoC’s Shanghai headquarters hiked mortgage rates in Shanghai, and the Shanghai municipal government closed an important loophole regarding property gifting. We expect Shanghai’s mortgage rate hike to be applied to other first and second-tier cities, loopholes in other cities to be closed and China’s central government to maintain or even introduce new property-related tightening measures, even as China’s economy faces a significant slowdown in coming months.
Coming quickly back to the flashy headlines, there’s a sense (and I mentioned this earlier Monday and hinted at it countless times since Jack Ma first irritated the Party last October, setting in motion what has since morphed into an all-out regulatory blitz) in which Chinese shares are uninvestable right now, or at least for the average person.
The scope of the losses for US-listed firms is mind-boggling. The Nasdaq Golden Dragon China Index has lost almost three-quarters of a trillion dollars in value since the highs in February. The two-day slide is the worst since the financial crisis (figure below).
(I tried to figure out a “Puff The Magic Dragon” joke, only with “Poof” to denote the evaporation of $740 billion, but I couldn’t quite get it right.)
The analyst commentary is highly amusing. Benchmark’s Fawne Jiang, for example, said we’re “entering uncharted territory with substantial moving parts.” “We can’t say what sector will be next,” one brokerage in Hong Kong remarked.
Perhaps the best summation came from a Bloomberg Businessweek article by Shuli Ren. “Does Beijing not care how much money foreign investors have lost? Does the government really want to close China Inc.’s access to the deep pool of global capital?”, the linked piece asked, before promptly providing the answer: “The short answer is, no, the government doesn’t care.”
You can (and should) read the whole article for the nuance, but the overarching point is that Xi is making a list of priorities. And your money is nowhere near the top of it.
By some accounts, the Trump administration spent the better part of a year debating various options for cutting off the flow of US capital to China. And China hawks on Capitol Hill have long lamented the extent to which US investors might be inadvertently funneling money to the CCP. As it turns out, Xi doesn’t even want it. He gets plenty of it every time you go to Walmart anyway.
I read an article in Engineering & Mining Journal back in 2012 that convinced me to never invest in a Chinese fund. Short story – Vail was producing iron ore from a Brazilian mine and shipping it to China on Chinese freighters. Thinking that they could enhance their profits by shipping on their own freighters, Vail placed a $1.6 billion order with the Chinese for twelve new freighters in 2008. The first freighter was received and took a shipment of ore to China where it was rejected by the port authorities due to the ship’s size. In January 2012, China officially banned the Chinese built vessels from Chinese ports due to safety concerns. Heads I win, tails you lose…
Here’s a url for the whole story: https://www.e-mj.com/features/china-ship-congestion-how-so-many-capesize-ships-got-locked-out-of-china-s-ports/
Even if the Puff the Magic Dragon joke didn’t land, I think your AMG pull for the title was brilliant. “Whatcha laughing at, not a damn thing funny.”
Xi Doesn’t Gotta Have It
Power is still more valuable than other peoples capital in modern China? Who’d a thunk it. A finger on the scale all others go to…
I think this is an excellent opportunity for democratically elected governments to come to their senses, David Rosenberg has said Capitalism and democracy need one another. Xi values power more than wealth- he is more worried about the fall of the soviet union than the cultural revolution. This is a basic and undeniable fact. To him anyone who is naive is fair game. Charlie Munger, who I greatly respect, has gotten this a little wrong. Money and talent go where they are welcome. End of rant.
I’ve been suggesting for quite a while now that for someone who claims to know a lot about China, and for someone whose job it is to allocate massive amounts of capital, Ray Dalio seems almost blissfully blind to the fact that western investors absolutely won’t stick around in China if it starts to look like things are taking a serious turn for the worst, either via a full-on anti-market crackdown or evidence that any of those “vocational camps” in Xinjiang might be… well, something even worse than the nightmare we already know they are.
I really hate this situation. It makes it impossible to pen anything like “balanced” commentary. You can’t dance around ~90% declines for nearly all of the names in a $100 billion sector, engineered ~20% three-day plunges for a nation’s best companies and, most importantly, a systematic effort to eradicate an ethnic group. Throw in the idea that both Washington and Beijing want Chinese shares delisted from US exchanges, and I’m not sure how Chinese shares are investable unless you have direct access to the A-share market or just want to double down on something “dumb” like EEM.