Is China’s Stock Meltdown an Opportunity for Investors?

It seems like yesterday when Chinese stocks were investment darlings, racking up outsized returns with no ceiling in sight—just the place to go for investors who wanted to diversify their portfolio while adding a little alpha. Suddenly, starting this last summer, it all appeared to sour. Recently, the Chinese stock market once again entered correction territory, down 20% from its recent highs. Would this be a good time to get on the Chinese stock’s bandwagon?

If it were happening in the U.S., just as it did last March, a steep correction is always a great opportunity for finding bargains in good companies caught up in the contagion. But something else is at work in China. Something that should give investors pause, even as great bargains come to the surface. It’s almost as if the CCP is allowing its stock market to melt down—almost as if they want it to. Consider the events that have unfolded in China this year.

Free Expression Crackdown on Hong Kong

The crackdown on free political expression in Hong Kong, once the bright, shining beacon of capitalism in Asia and China’s nexus to western ideology, has continued with the jailing of media and political leaders. In a direct repudiation of China’s agreement to allow Hong Kong to operate as an independent authority, it continues to tighten its grip around the province, driving any remnants of capitalism to other shores.

Putting the Regulatory Hammer Down on Powerful High-Tech Industry

More recently, we’ve witnessed a widespread regulatory clamp down by the CCP on its own high-tech industry. The new, tough regulations almost seem arbitrary, seemingly to prevent multi-millionaires from becoming billionaires. That seems evident with China’s cancelling of several high-profile IPOs. It’s okay to be successful in China, but not when it outshines the CCP.

If China’s objective is to squeeze out some of the excess capitalism that has created the second largest economy in the world, it is succeeding.  More than $1.5 trillion has been squeezed out of Chinese stocks causing the likes of George Soros to take his money elsewhere.

China’s Dimming International Star

China has also been dealing with its deteriorating position on the world stage. Issues like the origins of the coronavirus, the human rights violations of Uyghur Muslims, and its South China Sea aggressions, knocked China off its international perch.

Why is This Happening?

Maybe China is trying to have its cake and eat it too. China is not a capitalistic country. Everything about China—its people, industries, companies, and now its stock market—is controlled by the CCP. For decades, the CCP has had to walk a fine line between communist party rule and working withing the free markets when it served its purposes. Now, with people becoming multi billionaires, CCP rulers may feel as if they’ve crossed too far over the line.

China is all about having a strong economy, but not at the expense of creating huge disparities of income and power among its people and making it appear the free market is more powerful than the CCP. So, it was time to act.

It seems that the CCP values control over prosperity for its people. And maybe as the world’s second largest economy, it’s betting that it can continue to attract western capital even as it puts the hammer down on free market capitalism. However, once you unleash those forces, it difficult to put the genie back in the bottle. It appears China is intent on doing just that with the likelihood of further crackdowns.

What it Means for Investors

For a while, it seemed as though China was towing the free market line, albeit with the help of shady accounting methods, questionable trade practices, and a heavy dose of government subsidies to make to prop things up. They were building an economy around predictable business models, which is what attracts investors. Now, there is nothing predictable about China or its economy. Going forward, we just can’t know whether any company is valued correctly.

What seemed like fairly sound investment opportunities in China, with the likes of Tencent, Alibaba and Baidu, are now pure speculation plays. They have always have been to some degree, because of the political and economic uncertainty that clouds the country. But at least there were some fundamentals that could be applied. That has all changed since China’s “takeover” of the high-tech industry.

Yes, there are probably some significant bargains to be had in Chinese stocks. But with a paranoid government controlling the market instead of free market principals, do you really want to take that chance? You may have better luck with penny stocks.


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