China’s politics have wrecked its markets

A security guard watches a screen showing newly-elected General Secretary of the Central Committee of the Communist Party of China (CPC) Xi Jinping speaking during a news conference, in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province November 15, 2012. REUTERS/Stringer

HONG KONG, March 16 (Reuters Breakingviews) – Accumulated political and diplomatic errors are trashing valuations at listed Chinese companies. Having spent the last few years taking investors for granted, Beijing will struggle to reassure them now.

While the war in Ukraine has derailed markets everywhere, China’s crash is particularly vicious and increasingly indiscriminate. Domestic benchmarks are the world’s worst-performing outside of Russia; mainland exchanges have trimmed over $2 trillion in market value since the beginning of the year, per Refinitiv data. The biggest companies tracked by the CPI300 are down a fifth, while the Hang Seng China Enterprises Index has retreated to 2008 levels. Domestic traders are even fleeing safe-haven industries the government backs, like defence.

In New York, erstwhile tech favourite Alibaba (9988.HK), which once traded above $300 per share, is falling toward its IPO price of $68, as are many peers. The Golden Dragon Index tracking New York-listed Chinese firms is down around 40% year to date. Dark milestones are lurching into view. At the end of February, for example, the MSCI China Index reported a measly 1.5% annualised gross return since 1992.

This is mostly self-inflicted. President Xi Jinping’s decision to get close to Russia’s Vladimir Putin may have encouraged the latter to attack Kyiv. Blowback could subject Chinese companies and banks to secondary sanctions, while skyrocketing energy and food prices will cut into demand for Chinese goods and services at home and abroad. On top of that, officials are rolling out draconian methods read more to get control of a resurgent Covid-19 outbreak. That will suppress domestic consumption too, and most listed Chinese companies focus on local markets.

To diplomatic and viral headwinds add policy whimsy. The campaign to root out financial risk has degraded into rambling bureaucratic assaults. In 2021, for instance, the government converted the entire after-school tutoring sector, previously a popular trade, into a non-profit industry overnight read more . The cybersecurity regulator inserted itself into the listings process. Paranoid nationalist politicians refused to accommodate U.S. accounting watchdogs’ reasonable concerns about fraud, making it likely that China Inc will soon be locked out of New York.

Unlike the crash of 2015, the central government appears blasé about the selloff. Indeed the central bank left benchmark interest rates unchanged on Tuesday. That could be denial, or it could be acceptance: having done so much to destroy confidence in Chinese equities, Beijing might have no choice but to let them find bottom.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

– China’s benchmark CSI300 index that tracks large companies listed on the Shanghai and Shenzhen stock exchanges fell 4.6% to 3,983.81 on March 15, the lowest since June 2020. In Hong Kong, the Hang Seng China Enterprises Index has fallen to levels not seen since 2008.

– The Nasdaq Golden Dragon Index, which tracks U.S.-listed Chinese companies, is down nearly 40% year-to-date. The MSCI China Index is down nearly 30% over the same period.

Editing by Antony Currie and Katrina Hamlin