When Xi Jinping began his first term as the President of China in 2013, the country’s economy and markets were on the rise, and their future looked as bright as ever. In the following years, China’s economic progress was steady, and the idea that China would soon take over America as the largest economic power, was considered in the West as an established fact. Also supporting this belief was the meteoric rise of the Chinese stock market, with Chinese companies reaching huge market caps that rivaled their US counterparts.
The West: Close your nose and invest
China’s economic growth and market boom have been so dazzling that the West has largely ignored the burgeoning authoritarianism of the great leader Xi, whose tenure at the helm of the Communist Party has been characterized by militant nationalism, a rapid deterioration in human rights (including the semi-genocide). of Uyghurs), mass surveillance and detention, ever-rising censorship, and a cult of personality developing around Xi – a rather typical path to dictatorship.
The way China has handled the COVID-19 epidemic, including such horrific incidents as welding people’s doors from the outside to force total lockdowns, has made clear what many in the West have already begun to suspect: that China has become a totalitarian state. – Again.
Meanwhile, Xi Jinping, who was perceived as a free-market enthusiast at the beginning of his career as China’s leader, reversed his stance to reduce the government’s involvement in the economy. His government employed Communist Party officials in private companies, sometimes taking them entirely into the hands of the state. The government officials kept in the credit tap handle, decided how much credit and at what price should be given to the private sector by the state-controlled banks.
However, Chinese “state capitalism” has survived many hurdles, including a trade war with the US. Thus, the country’s stock markets still attract Western investors, attracting billions of dollars and euros that are betting on the continued rise of its highly successful corporations, such as Tencent (OTC: TCEHY), Alibaba (NYSE: BABA), ByteDance and others.
The enemies of the state from AliExpress
However, the suggestion that a country could be politically authoritarian while maintaining free capital markets was dealt a shattering blow in 2020 when the Communist Party issued a new set of rules for private companies, requiring them to serve the state. A few weeks later, Xi personally blocked what was expected to be the world’s largest IPO, Ant Group’s $37 billion offering. Before the IPO, Ant’s founder Jack Ma criticized the Communist Party’s economic policies – and the reckoning was fast and furious.
Ant Group was just the beginning of a crackdown on China’s high-flying firms, as Xi increasingly viewed successful corporations as unreliable and untrustworthy rivals to his tightening grip on the country. In recent years, it looks like Xi has been on a mission to destroy all private economic initiatives, sector by sector.
So, in 2020, Beijing rolled out a policy aimed at preventing a burst of China’s real estate bubble – but the sudden pivot in government-ruled credit availability hastened the crash, leading to a wave of defaults including those of large developers such as evergrande (OTC: EVGPF) and Kaisa (DE: KG5), as well as a crash in property prices. China’s real estate sector stands at about 30% of its GDP, posing a major risk to the economy, and is already reeling under Xi’s “zero-COVID” policy and the global slowdown.
Another state-induced crisis arrived in 2021, as Xi’s China continued to tighten its grip on the tech sector; The Chinese President’s attack on the “external expansion of capital” clearly showed the way forward. Actions followed the slogans, first with a flurry of regulatory blows and antitrust swings aimed at tech platforms like DiDi Global (OTC: Didi), with (OTC: MPNGF), and Pinduoduo (NASDAQ: PDD), and then dealing a knockout blow to the Chinese education tech sector.
Online schools were the one place where the state did not control every aspect of the curriculum as they did with regular schools. The Communist Party was clearly unhappy with this fact – so the authorities banned for-profit online education centered on public school and university curricula. Once the darling of Wall Street and venture capital, edtech firms like New Oriental Education and Technology Group (NYSE: EDU) and TAL Education Group (NYSE: TAL) were in the business of teaching, beyond the party-appointed lines.
You cannot have both economy and communism
Despite the fact that the communist crackdown on economic freedoms has been going on for several years and is clearly not ending soon, many Western investors remain optimistic about Chinese stocks. Even the poor performance of Chinese stocks did not discourage the China optimists: with all the declines, S&P 500 (SPX) is up around 9.5% in the last two years; Meanwhile, the Chinese Hang Seng index is down 35%. However, the ongoing sweeping change is expected to sink now after the Chinese stock market bloodbath that followed last month’s 20th Communist Party Congress.
Xi Jinping’s speech and his choice of a new leadership team unveiled his tightening grip on military and economic powers, clearly signaling a focus on security and state control rather than on business-friendly policies. Mr. Xi has cemented his one-man rule, and strengthened his control of all aspects of life in China – and the words of his speech do not bode well for the Chinese private sector and its investors. Obsessed with power and security, he is more focused on quashing all ideological and geopolitical challenges than on economic progress.
The agenda that is now expected to mark the way forward is “property common” – reminder of all the communist slogans of the long past days that ended without prosperity but with common suffering. Xi has signaled a move towards the concentration of the state’s role in the economy, implying that the role of private companies will be muted.
The hopes of China-optimistic investors that China would successfully combine socially restrained capitalism with “reformed” communism were dashed at the Communist Party Congress in October, where it was as much as stated that China would aim to dominate the world under eternal rule. From the great leader Shi.
Poetics aside, it should be clear by now that China is tilting away from free markets and back toward ideologically driven centralized planning. So it is not surprising that the shares of Chinese companies listed in the US. Or even delisted at any moment at the whim of the Politburo. Frustrated international investors pulled a record $2.5 billion from mainland China stocks on the day of the Congress alone.
China is uninvestable again
Surrounded by his crew of loyalists, the autocratic Xi will encounter little to no resistance to his efforts to turn the country’s focus away from economic growth to redistribution and state control. As only God knows which sector will draw the ire of Politburo, which leads to a sudden loss of value, Chinese stocks look uninvestable for any reasonable investor.
Of course, in the short run, all kinds of oddities are possible. However, as a rule of thumb, in the long run, a free economy and free markets cannot operate without a free society. Communism – all its versions, from Stalinist to Xi-ist – does not seem to work, neither politically nor economically. If you have established that, investing in Chinese stocks now would be similar to betting against the casino: it can work until the house changes the rules.