Market

China Triggers $1 Trillion Market Meltdown, And It’s Just Getting Started

The first real crisis of Chinese President Xi Jinping’s tenure was in the summer of 2015, when Shanghai stocks collapsed.

A 30% plunge in the market in just a few weeks began hitting Wall Street stocks, too. That put Xi’s team in all-out emergency mode. It pulled out all the stops: lowering interest rates; easing leverage limits; cutting reserve requirements; halting initial public offerings; shutting off trading in thousands of listed companies; letting punters use apartments as collateral to buy shares; calling on average Chinese to buy the market out of patriotism.

It worked, too. In the years that followed, the market soared. By 2018, Shanghai shares were added to the MSCI index as Beijing opened more and more channels for international investors to bet on China Inc.

Given the chaos of 2015, and the China’s success in moving beyond it, why is Beijing pushing the market back to the brink?

This is indeed a fair description of recent events in China. Beijing’s unexpected role as market wrecking ball arguably began in November, when the country’s regulators scrapped what would have been history’s biggest initial public offering.

Pulling the rug out from under the $37 billion IPO Jack Ma’s Ant Group had planned left investors surprised and confused. At the time, China’s regulators claimed they had hit the brakes on Ant out of caution. They needed to get the regulatory mix right to reduce systemic risk to the financial system.

Fair enough. But it was quite a coincidence that Ma’s IPO was pulled 10 days after he chided Beijing in a speech. Along with saying state-owned banks have a “pawnshop” mentality, Ma complained China’s regulators don’t understand the internet.

The weeks and months that followed saw Xi’s team clamp down more broadly on China’s Big Tech. Written between the lines in bold font is the sense that China’s leaders don’t want the country to be dominated by internet monopolies the way the U.S. is, for better or worse.

Yet the way Bejing is going about it has a toss-the-baby-out-with-the-bathwater vibe. Take the recent Didi Global fiasco.

On June 30, Didi raised $4.4 billion in a New York IPO, giving China’s answer to Uber a market value of roughly $68 billion. Days later, regulators swooped in to remind investors who’s boss. They forced app stores to remove Didi and ramped up a cybersecurity probe focused, supposedly, on Didi’s data use.

Just as investors were trying out that state intervention, China’s government went after China’s $120 billion private tutoring industry, demanding it turn non-profit. The out-of-nowhere move wiped out billions of dollars in value at a whole host of listed Chinese firms.

Technology shares retreated along with the education sector as Tencent was forced to relinquish its exclusive music label rights. Regulators said they only just realized the tech giant may be, it claims, violating antitrust laws.

The cumulative effect of the moves of recent months is more than $1 trillion of losses at times in just tech and education stocks since February. That has the Hang Seng Tech Index over in Hong Kong reeling, too.

Beijing’s scattershot approach in hitting some of the economy’s most vibrant sectors risks repelling foreign investors—a group China claimed to be courting. The upshot could be an exodus of foreign capital as investors lose trust in Xiconomics. Really, who would trust betting on a big Chinese IPO in the months ahead?

It’s hard not to conclude that Xi has decided capitalism just isn’t for China. The country’s leadership is effectively nationalizing certain thriving sectors—or leaping in that direction—and dictating what can be done with profits. Adam Smith has left the building when Xi’s team are telling Alibaba Group and Tencent how to reinvest their earnings. Or, strong-arming food-delivery giant Meituan to hike wages.

A capitalist system would use taxes and other incentives to prod companies to change behavior. In Xi’s China, it seems there’s less a strategy to raise its corporate game than official caprice taking out billionaires who attained too much power and influence.

As his dragnet extends from tech to property to food delivery to education, investors are thinking more about which sector is in trouble next more than focusing on China’s rapid growth. Is healthcare in Beijing’s crosshairs next?

The stated rationale for what’s afoot continues to evolve. Initially, it was all about curbing risk. Then it was about China avoiding a future in which tech giants tower over the economy the way Facebook and Google do in America. Now the spin is that China’s Big Tech putsch is about the yawning wealth gap.

Fair enough. But the more China takes out the billionaire founders innovating and creating new good-paying jobs, the harder it might be for a state-heavy economy to narrow the rich-poor divide on its own. Xi really does have a plan here, he might want to let foreign investors know what that might be.

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