Capital at risk as China stalls
THE Chinese’s government’s private sector crackdown risks scaring off international investors and undermining the country’s bid to rival the US for economic superpower status.
Despite talk of a US decline after the withdrawal from Afghanistan, its stock market still outguns all rivals.
Investors are increasingly wary of China after Premier Xi Jinping’s antitrust campaign triggered a stock market crash that wiped more than $1trillion from Chinese tech giants such as Alibaba Group and Tencent Holdings.
A state regulatory overhaul of the private education sector also hit sentiment.
Chinese shares are down more than 12 per cent this year, while the booming US stock market is up more than 20 per cent, as measured by MSCI.
Communist Party moves to “prevent the disorderly expansion of capital” have savaged investor sentiment, said Jason Hollands, managing director at Tilney Investment Management Services. “This is a reminder that investors cannot be complacent about political risk when investing in emerging markets, especially in countries with authoritarian regimes.”
Hollands said China has adopted the trappings of a market-based economy but in practice this is “phony capitalism”. “Scratch beneath the thin veneer and China is an illiberal, Marxist state where the priorities of the Communist Party take precedence.the interests of international investors rank way down the pecking order.”
Hollands said investors should not abandon the world’s second biggest economy, which will still provide opportunities for Western exporters but cautioned: “Understand the risks.”
Cracking down on the private economy risks leaving China permanently stuck as a middleincome nation, he added.
The country’s workforce is already shrinking due to its onechild policy and India is now better placed to grow. “India’s fast-growing population means it should overtake China as the world’s most populous country. And it is a democracy with an independent judiciary,” Hollands added.
Dale Nicholls, portfolio manager at fund China Special Situations, said China has launched previous crackdowns, including one in 2018 designed to reduce the number of young people gaming.
Tencent fell 50 per cent as a result but quickly recovered and Nicholls said recent falls could be a buying opportunity.
China has to create a stable investment environment to support growth and policymakers are seeking to calm markets, Nicholls added. “Government regulation is a constant in China and every investor must incorporate this in their risk/reward framework.”
Us-listed companies make up 60 per cent of the global stock market, against just 4.1 per cent for Chinese firms.
Saxo Bank’s head of equity strategy, Peter Garnry, said the US remains the economy and stock market to beat. “It will continue to dominate many high-growth technologies such as cloud computing, cyber security and biotechnology.”