fbpx

Why Are Chinese Markets Falling?

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

The financial media is replete with news about a $1.5 trillion selloff in Chinese stocks in recent times. Goldman Sachs, at the end of July, cited “disproportionately high index representation by tech and privately owned companies” for lowering its views on the MSCI China index. Commentators cited Beijing’s crackdown on Chinese tech companies as a significant factor.

This article will seek to give context for what’s happening with Chinese markets.

 

Root Causes

At the outset, it seems necessary to note that most companies popular with Western investors had no unannounced risk factors as Q2 2021 rolled in. While markets did slow down globally in Q3 2021, the degree of slowdown was nowhere close to such a large selloff. The root cause of it lies within China itself.

Late in October last year, Alibaba founder Jack Ma addressed the Bund Finance Summit in Shanghai as a keynote speaker. Serving as a backdrop to the then-upcoming IPO for his fintech offering Ant Group, Mr. Ma called Chinese regulators an “old boys club” fearful of new ideas and the Chinese banking system as having a “pawnshop mentality”. He went on to pitch the virtues of a digital currency as a solution to future problems and one that can be free of outdated constraints.

Within a week, the Ant Group IPO was suspended and new rules were drafted for regulating internet platforms. Within a month, the Politburo resolved to strengthen antitrust efforts and a probe was launched into Alibaba. Subsequently, a number of companies – predominantly tech – were investigated, prompting many to attribute Mr. Ma’s speech as being the genesis of the crackdown.

It bears noting that Mr. Ma’s speech was not the origin of the crackdown. As early as two years prior to his speech, regulators had been calling for action to address a number of problems: growing “moral corruption” among the youth, increasing familial financial burdens, the brutal work schedule in new companies, and so forth. A key factor underpinning these problems – as per the State – was the ongoing change in “culture”.

When Chairman Deng Xiaoping engineered the liberalization of the Chinese economy 40 years ago – effectively transitioning from a command economy to a mixed-mode economy and permanently cementing the “Sino-Soviet split” – Chinese graduates began to troop into top Western universities and companies. When many of these graduates eventually (and inevitably) went on to build companies, their focus was on the vast untapped Chinese market. With a distinct local advantage and starting out as clones of top Western companies, these companies continually evolved into every niche that the Chinese populace was looking to consume and engendered powerful economic change.

One attribute these companies’ founders imbibed from Western companies was competitiveness – employees worked longer, harder and for far greater reward than they would have within a State-owned enterprise while company management sometimes – possibly/allegedly – didn’t hesitate to take shortcuts to get to the top.

This idea of simply cloning Western ideas for the domestic market was also criticized by Mr. Ma during his speech – which most Western media sources did not transcribe or present to their readers fully. In this regard, Mr. Ma echoed the sentiments of Chairman Deng who, in a conversation with socialist Ghanaian president Jerry Rawlings in 1985, said “Don’t just copy China’s model. You have to walk your own path”.

However, where Mr. Ma and Chairman Deng differ was that while Mr. Ma seemed to be reposing faith in the burgeoning Chinese private sector and its resourcefulness, Chairman Deng’s interest in economic liberalization was rooted in improving China’s economic problems. The country’s political destiny, as per the venerated Chairman, would and must lie with the Party. This idea is shared by current Party General Secretary – and possible President for life – Xi Jinping.

Actions taken on Mr. Ma after his speech had a transformative effect on the magnitude of the State’s punitive actions. Alibaba was fined ¥18.23 billion ($2.8 billion) by the regulators in April for abusing its dominant market position by forcing online merchants to open stores or take part in promotions on its platforms – almost 1% of the company’s market cap. Exclusive contracts tying online merchants to platforms became the root cause for regulators to investigate JD.com and rising rival Meituan – with the latter facing a roughly $1 billion fine.

JD.com, Meituan and several other internet companies are also being investigated by financial watchdogs for practices that include but not limited to irregularities in mergers and acquisitions – a long-valued means of growth in China.

Approval for new games was already problematic to regulators due to the effects of gaming addiction among minors long before Mr. Ma’s speech. Tencent lost $60 billion in market cap (almost 10%) on August 3 after Economic Information Daily – a State-run economics newspaper – called gaming “spiritual opium”, a very loaded term in China. (The article disappeared from the web soon after its effects were felt but reappeared later in the day without said term and some other edits. Tencent closed down 6.1% that day). Loudly-stated concerns by State mouthpieces and think tanks over ongoing “moral corruption” of youth have led to gaming companies, short video platforms and vaping firms feeling the heat from regulators and in the stock market as well.

Tencent was also told that its recently-acquired competitors in music streaming may have to be sold and that its exclusive contracts with music producers must be terminated due to antitrust issues.

Targeted hardest were online education companies – a key (and expensive) means of help for children with the Chinese curriculum. Ostensibly done to ease financial pressures on families that have led to low birth rates, these companies will be barred from raising money through listings or other capital-related activities and must reorganise as non-profits while other listed companies will be barred from investing in them. Duolingo, a popular language-learning app, disappeared from Chinese app stores. TikTok owner ByteDance closed its education division with immediate effect.

 

Market Effect and View

While the ongoing crackdown might give an impression that the Chinese economy is tanking, a closer view of the market would be in order. For this, we shall compare the performance of the Nasdaq Golden Dragon Index (HXC) and the S&P China A 50 Index (CSSP50) – indexes that tracks U.S.-listed Chinese companies and the top 50 best-performing China-listed companies respectively – versus the CSI300, CSI500 and CSI1000 – which track the large- , mid- and small-cap companies listed in mainland China’s state-run stock exchanges.

Over a trailing 1-year period, virtually all indices were either recovering from the pandemic or attaining giddy heights midway through Q2 2021 before State actions began in earnest. The hardest-hit were the U.S.-listed companies with the next lot being the top 50 China-listed companies, with nearly matching underperformance. However, drawing up par with their performance as of last year are the state-run exchanges’ indices.

This is a clear indicator of two facts:

  1. The hardest-hit companies were the “blue-eyed” investor favourite tech giants with aggressive growth trajectories in high-consumption “consumer” segments;

  2. The larger Chinese economy is far more diversified and relatively unaffected.

This underlines what Goldman Sachs had highlighted: “tech” companies are too large a component of China-centric investments while the broader economy had been chugging along quite reasonably, largely unnoticed by Western eyes, all this time. China’s crackdown is simultaneously a lesson for investors to broaden their focus beyond “tech” and a warning to the nouveau riche to not dream of being above the nation-state.

Interestingly, as per the reported Put/Call Ratio over the past year, the global trading community seem to have faith that at least some top Chinese companies have largely internalized the lessons learned.

Using “China’s Google” Baidu – which has not been seriously censured till date – as a baseline for comparison versus the recently-chastised Alibaba and the currently-being-chastised JD.com, it can be seen that Alibaba’s ratio indicates that the market expects the worst to have passed for Mr. Ma while JD.com’s fortunes are still being considered a little tenuous. Such a scenario can be seen being played out on almost all the listed companies under fire.

 

In Conclusion

Given their wealth and power, the global tech nouveau riche might be accustomed to a certain leeway and deference from the Western populace and its political class. This is a key difference between the West and the East: in the East, the nation-state is the supreme embodiment of an ancient “culture” older than Christ and Moses which radiates beyond mere lines on a map. And by no means will this type of crackdown be likely limited to China.

In May of last year, the Indian government tabled a bill in Parliament mandating the localisation and protection of all Indian citizens’ data collected and monetised by tech giants. Expected to become law later this year, China – which typically doesn’t require a specific law be in place for a regulator to take action – has already demanded the same of tech companies as well.

Under fire by Indian parliamentarians over the company’s repeated failure to remove inflammatory fake news under amended laws, Twitter CEO Jack Dorsey stated that the company operates under its own rules. IT Minister Ravi Shankar Prasad replied that the laws of India are supreme in every case and that the country doesn’t need a lecture on freedom and democracy from the likes of Twitter. The company dilly-dallied to the brink of having its local management behind held personally responsible for spreading hate speech and the company’s expulsion before capitulating. All other tech giants – including Google and Facebook – had long affirmed their compliance by then. Antitrust actions by Indian regulators against the business practices of Amazon and Walmart-owned Flipkart – which were dismissed by U.S. Supreme Court – have been admitted by the Indian Supreme Court, despite these companies’ pleas, and legal proceedings are due to begin soon.

China and India hold a remarkably similar view in this case: the political class and teeming indigenous masses’ aspirations rank far higher than the supranational ambitions of a select few among the global tech nouveau riche – be they indigenous or not. Of course, how it works out for investors rests squarely on how deeply the principals that investors pin their fortunes on understand the ideas of “culture” and national boundaries, especially when it comes to these two behemoths representative of the East.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Violeta-540x540-1.jpg
Sandeep Rao
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Violeta-540x540-1.jpg
Boyan Girginov
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Violeta-540x540-1.jpg
Boyan Girginov
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Leverage Shares ETPs vs Other Leveraged ETPs
Leverage Shares ETPs vs Other Leveraged ETPs
Violeta-540x540-1.jpg
Oktay Kavrak
Leverage Shares ETPs vs Other Leveraged ETPs
Leverage Shares ETPs vs Other Leveraged ETPs
Leverage Shares ETPs vs Other Leveraged ETPs
How Do Leverage Shares ETPs Trade in Multiple Currencies
How Do Leverage Shares ETPs Trade in Multiple Currencies
Violeta-540x540-1.jpg
Pawel Uchman
How Do Leverage Shares ETPs Trade in Multiple Currencies
How Do Leverage Shares ETPs Trade in Multiple Currencies
How Do Leverage Shares ETPs Trade in Multiple Currencies
ETF vs ETP: What they are and how do they differ?
ETF vs ETP: What they are and how do they differ?
Violeta-540x540-1.jpg
Violeta Todorova
ETF vs ETP: What they are and how do they differ?
ETF vs ETP: What they are and how do they differ?
ETF vs ETP: What they are and how do they differ?
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.
Violeta-540x540-1.jpg
Sandeep Rao
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.
A quick primer on leveraged instruments available in markets today.
Investing in commodities offers investors unique advantages.
Investing in commodities offers investors unique advantages.
Violeta-540x540-1.jpg
Violeta Todorova
Investing in commodities offers investors unique advantages.
Investing in commodities offers investors unique advantages.
Investing in commodities offers investors unique advantages.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Violeta-540x540-1.jpg
Sandeep Rao
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Coinbase aims to grow beyond Bitcoin and America while staying true to both.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Violeta-540x540-1.jpg
Boyan Girginov
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Fed’s potential rate cuts, boost sentiment. Possible market correction.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Violeta-540x540-1.jpg
Boyan Girginov
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.
Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

Coinbase: Crypto Summer Incoming?

S&P 500 melt-up

Nvidia delivers, but stock nosedives

How do Leverage Shares ETPs differ from other leveraged ETP issuers

How Do Leverage Shares ETPs Trade in Multiple Currencies

What is the difference between ETF and ETP?

Build your own ETP Basket
Leverage Shares: Europe’s top leveraged and inverse ETP provider.
Main ETP benefits
Common investor questions

Get the Newsletter

Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. 

By clicking you agree to the Terms and Conditions displayed.