Uncertainty Surrounds Chinese Stocks

Our markets have been on an uptrend with very little volatility since the “pandemic recession” of March 2020. So far this year, the S&P 500 is up significantly and showed no signs of stopping until September. (Not to mention, historically, September has the worst track record of any month.) Volatility returned in September, with the market index down 2% over the last five days (as of 9/21). This is not a huge move. In fact, it is quite mild for a stock market move. With fears of inflation and the Federal Reserve tapering, the market has been paying attention. The big question mark hitting the global economy in September is China.

China had been looking, well, western. Xi Jinping, the Chinese president, wants to change all that. China is a totalitarian communist country and has started dialing back the freedoms of private capital and western ideals. His plan is to move toward “a modern socialist power.” Xi looks to exert power over the flow of money and limit the ability for entrepreneurs and investors to make money. Going further, Xi emphasized a goal of “common prosperity.” 

Some highflyers on the American stock market were Chinese companies, such as Alibaba (BABA) and Baidu (BIDU). Alibaba is sometimes referred to as the Amazon (AMZN) of China and is their e-commerce giant. Baidu is a Chinese provider of internet searches, online advertising and other internet services. Both stocks have taken a huge dive on the U.S. stock market since China began changing its economic stance. China indicates it will distribute from the rich to the less fortunate and have private businesses serve the state.

The latest in the China economic upheaval is Evergrande, which caused a drop in stock markets around the world last week. Evergrande is a Chinese real estate company and the second largest property developer in China by sales. The government took measures to lower housing prices, causing a cash crunch at Evergrande. It holds over $300 billion in debt, which makes it the most indebted real-estate business in the world. The problem is the two repayments on debt due in the next month, which the company says it may not be able to meet due to the cash crunch.

A default from the company would affect many industries around the world. Would it be as bad as our 2008 Lehman bankruptcy that disrupted every financial system around the world? The consensus is no. Would it hurt China’s economy and lead to lower growth worldwide? Yes. Chinese consumers have paid for houses that will never be built. Will China rescue Evergrande, i.e., “too big to fail?” The word from the state-controlled Global Times is, “Once the problem explodes, the enterprise cannot have the fluke of being ‘too big to fail.’ They must have the ability to save themselves.” 

In a nod to eliminating western culture’s influence, government officials have erased a Chinese actor. Zhao Wei is a billionaire actress who was completely deleted from the Chinese internet.  The government says they must ban “actors with stains, scandals and problematic integrity.” Zhao cannot be found online in China and her name is removed from all online credits for the movies she appears in. This is the kind of control the Chinese government wants and uses.

In short, the unknowns in China, the amount of debt held by Chinese companies and the increasing control by the government all point to a very uncertain outlook for the Chinese economy and stocks. In my opinion, there are better places to put money.  

All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice.  Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.

Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.