• December 3, 2022

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Chinese president Xi Jinping’s move on Sunday to secure an unprecedented third term in power and replace four of the seven members of the powerful standing committee of the Politburo with loyalists sent stocks tumbling Monday, and investors are still taking stock of the damage.

The Hang Seng Index tracking the Hong Kong stock market fell 6.4% Monday to its lowest level since 2009 and stayed flat a day later. The Nasdaq Golden Dragon Index, composed of U.S.-listed Chinese companies, including tech giants like Alibaba and Baidu
BIDU
, fared even worse with a 14% drop on Monday, though it rebounded 4.2% on Tuesday.

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But onshore investors didn’t feel as much pain. The SSE Index of stocks traded at the Shanghai Stock Exchange was down only 2% Monday and 18.2% so far this year, compared with the Golden Dragon Index’s 47% year-to-date plunge. Jason Hsu, founder and chairman of Rayliant Global Advisors, which has $99 million in its actively-managed Quantamental China ETF, thinks there are still opportunities to invest in manufacturing and exporting stocks, especially if Xi’s government injects stimulus to subsidize job growth.

“It’s going to be the older economy, more of a brick-and-mortar real economy with lots of employment that will benefit,” Hsu says. “Scalable tech that’s mostly replacing people with software, they could be good businesses, but they’re not going to get a lot of play when it comes to wanting to be in front of the stimulus from Beijing.”

Xi’s move to continue his presidency didn’t come as a surprise, but many of China’s longtime bureaucrats who oversaw its growth into a world economic powerhouse during previous administrations into Xi’s first decade were ousted, including Premier Li Keqiang, a respected economist and Xi’s second in command. Xi’s predecessor Hu Jintao was escorted out of the Chinese Communist party’s twice-a-decade Congress, which state media attributed to Hu “not feeling well” but many took as an indication that Xi is solidifying his power.

Xi has spent recent years reining in the tech companies that minted ultra-wealthy Chinese billionaires like Alibaba’s Jack Ma and Tencent’s Ma Huateng, imposing billions in fines from antitrust regulators and enticing those companies to pledge more than $30 billion to “common prosperity” initiatives. It forced thriving online tutoring companies to become nonprofits last year, erasing most of their market values overnight. Restrictive Covid policies since the beginning of the pandemic have also limited economic growth.

“JPMorgan is saying this selloff was not due to fundamentals–what is more fundamental than the regulatory environment on which growth was built?” says Perth Tolle, creator of the Freedom 100 Emerging Markets ETF
FRDM
, which invests in emerging nations ranked by personal and economic freedoms and excludes autocracies like China. “Growth in China was built on the increase in economic freedom from the time of Mao to the policies under Hu Jintao.”

China did get some good news on Monday that was overshadowed by the government overhaul, reporting 3.9% GDP growth in the third quarter to beat expectations after delaying the data release by a week and growing just 0.4% a quarter earlier. Xi often cites economic development as his top priority and set a goal of becoming a mid-level developed country by doubling its per capita GDP by 2035. China’s renminbi has weakened 13% against the dollar this year, but Hsu thinks Xi will keep an eye on his currency and underperforming stock market as well in an effort to cement his legacy.

“He’s going to care about how he is viewed as a leader for the country historically, and I’m not just talking about the history of the Communist Party, but the 6,000 years of emperorship,” Hsu says. “With the stock market being so visible–in China the stock market is mostly retail trading–if you have a bad stock market, that appears to be a vote of no confidence against Xi Jinping’s administration. I think they will look at that as a [key performance indicator] and manage it.”

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