Why Foreign Investors Are Accelerating Their Exit From the Chinese Stock Market.
Fewer and fewer investors are willing to bear the risk of a "State market".
It is now more than a month since the war between Ukraine and Russia started. Russia is still bombing Ukrainian cities and spreading terror. There are insistent rumors that they have already started using chemical weapons. Western leaders continue to stand their ground, going from meeting to meeting, but they can only see their inability to intervene beyond sanctions and arms shipments.
Their assistance to Ukraine is valuable, but it will probably not be enough in the short term to make Vladimir Putin bend.
Meanwhile, foreign investors are fleeing Chinese stocks. The amount of Chinese shares listed in China sold by international investors has just exceeded $10 billion. This is a huge amount, approaching the record of March 2020 with the COVID-19 crisis.
This is a complete reversal of the trend since China had been promoting foreign investment in Chinese stocks for many years. And investment in Chinese stock markets had surged when China was included in the main stock market indices. By the end of 2021, foreign investors held about $600 billion worth of Chinese stocks listed in China.
This distrust is one of the 9 major risks that threaten the Chinese economy in the coming months.
To explain this mistrust of China, we can cite several elements:
First of all, the takeover of “speculation” by the Chinese government which wants to promote “general prosperity”. A takeover that has notably caused the collapse of the real estate development sector. Evergrande has been the most famous victim of this worldwide for several months, but the problem extends to the whole sector in China.
Some investors have found out the hard way that private companies are not quite private in China and that the real governance of companies is more in Beijing than at the company's headquarters. We have seen this with the private education companies that disappeared overnight or the gaming sector with the limitation of the playing time of the Chinese youth. Decisions that would be unthinkable in the Western world.
Faced with what is happening between Russia and Ukraine, nobody can avoid thinking about China and Taiwan. One cannot help but have the vague feeling that we are witnessing a repeat of what could happen between China and Taiwan.
And if China were to invade Taiwan one day, and there is a good chance that it will eventually do so, neither America nor Europe will send a single soldier to be killed. Instead, sanctions will be imposed in the same manner as those currently being imposed on Russia. Their impact will be less devastating for China than for Russia, but who wants to get caught up in that turmoil?
More and more fund managers are therefore taking the gamble of leaving China. Why? So as not to be dependent on the arbitrary and unilateral decisions of Xi Jinping.
Final Thoughts
The Chinese administration has just intervened to support its stock market. It does not want a crash. A crash would ruin many Chinese investors, especially individuals, who have taken on debt to speculate in the stock market. The Chinese market could therefore rebound. In any case, China does not need foreign investors to live.
The Chinese market is a market that can largely function independently, but it is a market whose rules are distorted. Indeed, it is above all a “state market”. This explains why more and more investors are leaving China. This trend is not ready to be reversed.
For those who still have doubts about the risks of this type of market, you only have to look at what is currently happening in Russia. The Moscow Stock Exchange reopened after a month of closure at the end of last week. Well, almost, since foreigners were not allowed to sell their shares. Under these conditions, it was logical that the market was in the green, with Gazprom jumping more than 15%.
Market rules under a dictatorship. One more reason to stay out of China for those who can.
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