Has Xi Jinping lost control of the markets?

A man in front of an electronic board at the Shanghai Stock Exchange on June 19, 2006.  Reuters/Eli Song/File
A man in front of an electronic board at the Shanghai Stock Exchange on June 19, 2006. Reuters/Eli Song/File

this year, The journey of Chinese stock investors has been a hair-raising one, While the US index S&P 500 reached historic heights, China and Hong Kong markets suffered a loss of $ 1.5 trillion Only in January. Retail investors have taken to Chinese social media to express their disappointment. The collapse was so brutal that on February 6 the Chinese President was informed, Xi JinpingAnd the next day he got fired yi huiman, head of China’s securities regulator. There was some improvement in prices when government-owned companies started buying shares. These may increase further in the coming days.

However, if we take a step back there is no doubt that the bigger picture is desolate, The market value of Chinese and Hong Kong equities has almost fallen 7 trillion dollars From its peak in 2021, about a drop 35%while of US shares have increased by 14% and Indian shares have increased by 60%, This decline points to a fundamental problem. Domestic and foreign investors viewed the Chinese government as a reliable manager of the economy. Now this trust is there Busywith serious consequences for China’s development,

Less than a decade ago, Chinese markets were euphoric. Foreign investors were eager to tap the potential of the rising global economic star. China was growing at a steady and impressive rate of more than 6% Annual. Foreign portfolio investment increased due to receipt of foreign investors Direct access to Chinese stocks through Hong Kong in 2014, Four years later, the financial firm MSCI Began to include mainland Chinese stocks in its global indices. The Chinese government, for its part, hoped to attract foreign capital and expertise to professionalize its markets and create an asset class to replace real estate. A group of wealthy businessmen and investors was emerging, whom Xi himself urged to stay sugar dream,

The underlying understanding was that, regardless of Chinese policy, its officials could be trusted to lead the economy to prosperity. China will continue to grow at a rapid pace, its citizens will continue to value wealth and economic stability before political freedom, and foreign investors will reap huge profits. Everyone can become rich.

File image of Chinese President Xi Jinping.  EFE/EPA/LUONG THAI LINH/POOL
File image of Chinese President Xi Jinping. EFE/EPA/LUONG THAI LINH/POOL

What’s wrong? One of the most famous problems Xi’s lax policy, He tightening technology regulations Which started in 2020 reduced investor confidence, The exit from shed zero was a failure. The government is hesitating in front of a real estate crisis which has weakened savings and confidence and dragged the economy into deflationBy January prices were falling at the fastest pace since the 2007-2009 financial crisis. It’s no wonder you want to prevent the bubble from re-inflating. But he wants to avoid handouts and focus on areas of growth “high quality” Which, in his opinion, They will help China counter the technological, economic, and military power of the United States, However, profits in these sectors also fell last year. And China lacks the stimulus it needs.

which is less appreciated Foreign investors have become disillusioned with China, They have to contend not only with bad policy, but also with the risk that Its investments are at risk as its relations with the United States deteriorate, They have been net sellers of Chinese stocks for months. Whereas asset managers once applauded China’s inclusion in global indices, they are now developing products that exclude it. Instead, investors look at IndiaWith its large population, and in Japan, with its cutting-edge technology. Hong Kong has also suffered losses. Companies from the continent represent three-quarters of its market capitalization. On January 22, India briefly overtook it to become the world’s fourth largest stock exchange.

Most worryingly, mainland investors are also lose confidence, After three decades of extraordinary growth, China’s rich are experiencing a painful blow to their fate, as explained in our briefing this week. Both their real estate and financial investments are sinking, and surveys indicate that many white-collar workers faced pay cuts last year. everything points to this capital is leaving china, Those who cannot escape Chinese capital controls are taking refuge in safe money market funds or publicly traded mainland Chinese exchange-traded funds.

An investor sits in front of a board displaying stock information at a brokerage office in Beijing, China on December 7, 2018.  Reuters/Thomas Peter/File
An investor sits in front of a board displaying stock information at a brokerage office in Beijing, China on December 7, 2018. Reuters/Thomas Peter/File

All this will deal a serious blow to China’s development. Our analysis of household surveys shows that a small but influential group of people own the majority of China’s financial assets. Their difficult situation will impact reduction in consumption and investment decisions. Investors stranded in mainland China will have no other option Invest some of your money in shares, On the other hand, it will be more difficult for foreigners to return. This will cost China a huge price, even if foreign investors retain only a small portion of its equity. Over the years they have provided a useful outside check on asset prices. Furthermore, its entry into the market a decade ago was linked to greater capital expenditure and investment in research and development by Chinese companies. On the contrary, their departure may harm innovation.

It seems Xi knows something is wrong. In addition to removing Yi, the government has curbed short selling and ordered state asset managers to buy shares. This may support share prices for some time. But this interference only exposes China’s distrust in marketsUnderscoring why investors have walked away.

Far from accepting the need for radical change, Xi is making things worse, In my country, suppressing criticism of the economy, At the same time, China’s distrust of foreign companies is increasing. Financial data is becoming increasingly difficult for foreign investors to obtain. New regulations for the gaming sector were proposed in December, but were quietly withdrawn after poor market response. In January, the central bank refused to cut interest rates despite continued deflation, surprising markets. It’s all just useful scare investors,

The real obstacle to change Xi firmly believes that he and the Communist Party should have complete control, It is necessary to regain the confidence of investors Rethink the role of the state in the economy, But Xi is unlikely to loosen his grip, Investors believed that Chinese politics should not interfere with their ability to make money. Now that they know they can’t avoid politics, they will act more carefully.

© 2024, The Economist Newspaper Limited. All rights reserved.

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