Chinese assets and, perhaps more aptly, the people who trade them, weren’t amused with Xi Jinping’s installation of one-man rule.
H-shares dropped more than 7% Monday, following the unveil of Xi’s new Standing Committee, which I described Sunday as “a panel of committed loyalists, whose fealty to Xi will invariably supersede all other concerns in all matters.”
Li Qiang, Party secretary of Shanghai, will likely replace Li Keqiang as premier. That means the man tasked with overseeing a sweeping lockdown blamed for a dramatic deceleration in economic activity will henceforth stand in for a pragmatic premier who, during the Shanghai curbs, pleaded publicly for the Party to support the economy and particularly employment.
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Xi also dropped PBoC governor Yi Gang, Yi’s deputy and vice premier Liu He from the Central Committee, a decision which, in my opinion, bodes very poorly for markets as well.
Monday’s 7.3% rout in Hong Kong-traded Chinese shares was the worst since 2008 (figure below). Note that the necessity of using a y-axis which includes double-digit swings during the financial crisis belies the scope of Monday’s losses. It was a meltdown.
Needless to say, Monday was the worst post-Congress performance for H-shares since the gauge’s inception.
Goldman reiterated their preference for A shares over offshore equities. “The risk premium for the latter could stay elevated in the short run, possibly due to investor concerns over the absence of recognized market-oriented economic reformers in the newly configured PSC,” the bank said.
The Hang Seng dove more than 6% to the lowest since the GFC (figure below).
The gauge of city shares has been cut in half since early 2021, when Xi’s crackdown on mega-cap Chinese tech gathered momentum.
Speaking of mega-cap Chinese tech, Monday was a veritable bloodbath. Alibaba and Tencent fell nearly 12% each, Meituan almost 15%.
The Hang Seng Tech index shed nearly 10% (figure below). If you had to choose just one indicator to gauge the scope of Xi’s power, the Hong Kong tech index would be a good candidate.
Consider that the index, which represents the 30 largest technology companies listed in Hong Kong, including a bevy of household names, is now down 75% from records reached when Xi began to turn the screws on China’s tech behemoths.
This is a case where I’ll say “I told you so.” Time and time again since the onset of Xi’s regulatory blitz I warned that most analysts simply didn’t grasp what was unfolding. For example, on July 26, 2021, I penned a piece called “Xi Doesn’t Want Your Money.” That same day, I was even more direct in “Beijing Teaches ‘Mr. Market’ A Lesson. But You Folks Will Never Learn.” A month later, on August 31, 2021, I declared market calls “worthless” in the face of what Chinese state media took to calling a “profound revolution” under Xi.
I could go on. And I will. On July 10, 2021, when Didi’s star-crossed IPO opened a new front in Beijing’s tech crackdown, I wrote that,
You’ve probably seen plenty of commentary emanating both from professional analysts and home-gamers suggesting there are “bargains” to be had amid the rout. That may be true. But you shouldn’t harbor any delusions. This isn’t a falling knife in the traditional sense. It’s not merely a matter of timing it correctly so that you grab the handle, not the blade. The fundamentals don’t matter and neither do the technicals. All that matters is the Party. I’ll confess to taking a bit of pleasure in documenting these types of situations. It’s conceptually similar to what happens when purported EM “experts” (many of whom have years of experience trading EM FX and debt) take Turkey’s Erdogan at his word. If you refuse to acknowledge the realities of autocratic regimes on the misplaced notion that capital markets can impose “discipline” on dictators, you’ll be perpetually disappointed.
Unfortunately, there was scant evidence Monday to suggest analysts are any less naive now than they were in 2021.
I’ll be as direct as possible: The vast majority of analysts simply don’t know what they’re talking about when it comes to Chinese assets at this juncture. To make any sort of judgment calls on local assets you need a historian, a political scientist or someone who’s been around long enough and is politically active enough to understand what’s going on.
14 months ago, in an Op-Ed for the Financial Times, George Soros delivered a stark warning to investors which echoed my own talking points around market participants’ unwillingness to come to terms with the reality of authoritarians and autocratic regimes.
“Foreign investors who choose to invest in China find it remarkably difficult to recognize [the] risks,” Soros wrote, adding that,
They have seen China confront many difficulties and always come through with flying colors. But Xi’s China is not the China they know. He is putting in place an updated version of Mao’s party. No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.
A few days later, Soros penned a somewhat caustic Op-Ed for The Wall Street Journal, chiding BlackRock, which had recently launched a suite of products tailored to Chinese investors.
“BlackRock takes its responsibilities for its clients’ money seriously and is a leader in the environmental, social and governance movement [b]ut it appears to misunderstand President Xi’s China,” Soros wrote, echoing his FT Op-Ed, before suggesting that anyone who poured money into Chinese assets would be making “a tragic mistake.”
Although Soros was unequivocally correct about the perils of investing in Chinese assets amid Xi’s push to consolidate power, he missed the mark in May when, while speaking in Davos, he said that, “Contrary to general expectations, Xi Jinping may not get his coveted third term because of the mistakes he has made, but even if he does, the Politburo may not give him a free hand to select the members of the next Politburo.”
Even Soros underestimated Xi, it would seem.
The rout in in Chinese tech giants is really something hard to grasp. I stopped paying much attention to these ticker symbols when I decided I could not invest or trade these stocks given uncertainty with Xi’s policies. Looking at the charts again today after this refresher from H, I can’t help to be amazed and terrified even though I don’t own any and it comes as no surprise, some of these tech giants trade below their IPO price now, we might be witnessing the demise of private innovation in China, it is state approved or sponsored or it does not exist.
Frightening, indeed.
Luckily, China is one area (maybe the only area) of the global markets I think I have always correctly understood. I put it on my “do not invest here” list on the day Ma was “removed” from office.
Patiently waiting for H to talk more about the future global implications, including on the US stock market, as a result of Xi’s third term…..
“I could go on. And I will.”
Such a good sense of humor that our Professor possesses.