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What’s Ahead For China’s Stock Market

15 August 2022

Foreign investors are leaving the Chinese stock market in droves amid the country’s ongoing COVID restrictions and crackdowns on private businesses. In recent months, the experienced old-school Singaporean investor Anndy Lian has been selling Chinese stocks, reducing his portfolio’s exposure to the world’s second-largest economy. Once a big fan of Chinese tech companies, Lian now sees Chinese assets more like a bet in the casino as Xi Jinping’s autocratic strong trend and endless COVID lockdowns darkened China’s economic outlook.

Instability is China’s biggest problem. The overall situation in the country is uncertain and goes far beyond the financial sector. Overseas investors lost more than $150 billion in Chinese yuan-denominated assets in the first quarter of 2022, the highest drawdown ever. Chinese bonds’ sales stood at $61 billion in February-May.

According to the Washington-based Institute of International Finance, approximately $300 billion could leave the country this year, more than twice last year’s $129 billion. China’s economy narrowly escaped contraction in the second quarter, expanding by just 0.4%, a sharp decline from the 4.8% growth in the first quarter. Lian said the effects of last year’s hi-tech crackdown, which led to lower stock prices for major players such as Alibaba, Tencent and Didi, are still active. 

In one of the biggest episodes of China’s techlash, the taxi app Didi lost 80% of its market capitalization — more than $60 billion within a year after going public when Chinese regulators accused Didi of violating privacy rules. After all, Didi listed itself on the New York Stock Exchange in June. Last year’s government pressure on the high-tech segment presented how the high startup value, such as Didi, can be destroyed quickly.

Threats and promises

It is historically ok that China’s economy faces increased political risk. Another standard is the very rapid pace of regulatory change. The image can change with the speed of a flash. While Chinese officials have vowed to ease pandemic restrictions, Xi has repeated, there would be no way out of COVID. Investors are getting mixed signals.

Last month, authorities announced the launch of Swap Connect, allowing foreign investors to participate in the mainland Chinese financial derivatives market. More than 80 exchange-traded funds listed in Shanghai and Shenzhen will be available to investors in Hong Kong. Beijing also announced that it would increase its FOREX swap with Hong Kong to provide additional liquidity to the offshore yuan.

But moving from N-shares (Chinese stocks listed in New York) to Chinese or even Hong Kong listings will not be easy. Investor sentiment has suffered. It is unlikely that Swap Connect will change the situation with the investors’ exit from the Chinese market. The new mechanism may help attract new investors to China but is unlikely to keep those already on the move.

The Communist Party agenda

While Beijing is attracting more and more foreign investors, one should keep a close eye on them. Last month, the China Securities Regulatory Commission officially issued guidelines that, in all seriousness, require the creation of Communist Party micro divisions in global hedge funds operating in China. The goal is to monitor compliance with labor standards, equality and other social norms. Maybe it’s not a bad idea, but a communist cell in a private company might seem daunting to an international investor.

The twisted pandemic mirror

Many people in China don’t even know how dramatically their country’s perception has changed abroad. China’s great wall of the “zero COVID” policy and the information vacuum work like a distorting mirror in both directions. Capital is not allowed to circulate normally. The information is misrepresented.

Beijing may need to work harder to make its economy more attractive to foreign investors and to safeguard local capital. Internal investors are scared too.

Many Chinese investors are now shifting their focus towards Singapore. It’s certainly a trend. A significant part of Chinese entrepreneurs, especially in the cryptocurrency segment, seeks to settle down and start a business in Singapore, where there is more certainty, comprehensible state guarantees and respect for an investor.


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