What happened
Chinese stocks fell sharply this morning after Chinese President Xi Jinping won an unprecedented third term in office, which will last for the next five years. For several decades, Chinese presidents have been limited to two terms.
The news caught investors off guard and sent Hong Kong’s benchmark Hang Seng index down 6.4% on Monday for the index’s worst day since the Great Recession.
Shares of the Chinese e-commerce giant Ali Baba (BABA -12.51%) traded around 18.5% lower at 10:23 a.m. ET today. Shares of another major Chinese e-commerce company, JD.Com (JD -13.03%)trading down 20%, and shares of a Chinese online tutoring company TAL Education Group (TAL -17.26%) were down about 25%.
So what
The startling news of Jinping’s third term came at the end of the 20th Congress of the Communist Party of China, a major political event held once every five years in which the party shapes future policy initiatives. Jinping will now serve as president in China for the longest period since Mao Zedong.
It’s already been a tough year in China, where Jinping has faced widespread criticism over his “zero-COVID” policies, which led to widespread lockdowns for months and drastically reduced gross domestic product (GDP) growth. ) This year. .
Heading into 2022, the Chinese government had forecast GDP growth of 5.5%, but most analysts expect the country – and the world’s second-largest economy – to fall well short of that forecast.
“While Chinese politics have long been opaque, this strong consolidation of power adds to investor unease. Equity valuations, already near a 10-year low, will likely come under more pressure if international investors demand a premium of higher risk,” said Mark Haefele, chief executive. investment officer at UBS Global Wealth Management, said in a recent research note.
Not only has Jinping not indicated any plans to ease its “zero-COVID” policies, but its administration has not always been easy with Chinese tech stocks trading in the United States. In 2021, regulators hit Alibaba with a record fine equivalent to $2.75 billion in an antitrust case that said the big company abused its power. The fine came shortly after Alibaba CEO Jack Ma criticized regulators. In the past, regulators have also targeted online tutoring companies like TAL Education Group.
Still, the Chinese government has been more supportive of tech companies this year. The government provided fiscal stimulus and worked with U.S. financial regulators to end a long-running dispute over audits that threatened to see hundreds of Chinese stocks delisted from U.S. exchanges.
Now what
Chinese tech companies have all kinds of potential, given that they are new disruptors within a massive population that is also the fastest growing consumer market in the world.
But a constant problem has been how quickly and surprisingly China’s government and regulators can hurt stock prices with regulatory news or geopolitical events. Tensions with the United States also seem to be escalating lately.
Investors generally dislike less democratic countries because they are less likely to believe that these countries truly have free markets. While the Chinese economy is undeniably a huge opportunity, moves like this do not support the idea of free markets.
While I still believe that companies like Alibaba and JD.Com have great potential, especially after the big sell offs this year, before investing you really need to understand the geopolitical landscape and how it may affect Chinese stocks. Like it or not, this kind of awareness has to be part of your investment thesis in this sector.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool fills positions and recommends JD.com. The Motley Fool recommends TAL Education Group. The Motley Fool has a disclosure policy.
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