It’s rare to see the government of an advanced economy cause so much damage to share prices, but by the close on Friday we had a great picture of the extent of the financial losses the Chinese Communist Party-led government has done to its market and that of Hong Kong in the past couple of months.
The huge slump in Chinese and Hong Kong markets has been overshadowed by the strength of European and US markets, the rise of Covid infections and the rapid collapse of Afghanistan last week and the taking of control of that troubled country by the Taliban.
While Covid Delta has provided a late overlay to the hardline crackdown on China’s best performing sector – its huge and vibrant online companies in every sector of the digital world – the real destruction in value and reputations is down to the paranoia and desire for total control of President Xi Jinping and his gang.
China’s tech stocks slumped to new lows on Friday and Hong Kong’s benchmark index hit an almost 10-month trough, as the rolling Chinese regulatory crackdowns crushed share values and investor confidence.
In fact, at Friday’s close the Hang Seng is now in correction territory – down 20% from its peak in February and China’s blue-chip CSI 300 index is down nearly 18% in the same time.
Reuters estimated that more than $US560 billion in market value was wiped off Hong Kong and mainland China exchanges last week as investors bailed out of once hot sectors out of once-hot companies, scared they might be trapped by the next attack from Beijing regulators.
The Hang Seng fell 1.8% and its weekly 5.8% fall was the largest since the height of the pandemic panic in financial markets in March 2020.
The Shanghai market also fell, while investors sold risky corporate debt and the Chinese currency which saw its biggest weekly loss in two months as investors rushed to safety amid global coronavirus concerns.
Investors sold the China and Hong Kong shares of Chinese tech giants and moved into the US listed shares of the same companies which had fallen in value in the continuing crackdown.
US listed shares of Alibaba Holding Group, Tencent Music Entertainment Group, Didi Global and iQiyi Inc rose by between 1% and 4.5% on Friday.
Last week alone China announced tougher rules on competition in the tech sector, summoned executives at property developer Evergrande to warn them to reduce the firm’s massive debt and state media reported looming regulations for liquor makers, a favourite investment for foreign fund managers.
Reuters says the rolling crackdowns from steelmaking to e-commerce and education, the moves are sapping faith in a market that seems yet to find a floor after months of selling.
The Shanghai Composite dropped 1.1% to its lowest close in more than two weeks on Friday and the CSI 300 index fell 1.9%, with liquor makers leading losses. That index has lost almost 10% this year (compared to an 18% gain for Wall Street).
The epicentre of the selloff has been the tech sector, which had been popular with foreign investors who are now afraid they can’t quantify the regulatory risk and are selling in droves.
Hong Kong’s Hang Seng Tech index, comprised of many one-time darlings, dropped 2.5% on Friday to a new record low and has shed about 48% since February.
E-commerce titan Alibaba’s Hong Kong shares fell 2.6% to a record closing low and have halved from an October peak. Internet giant Tencent touched a 14-month low and food deliverer Meituan hit a one-year low.
Reuters said that as a result, Alibaba now commands its lowest price-to-earnings ratio since its listing in New York in 2014 and Tencent its lowest in more than eight years.
And all this, plus Covid Delta has arrived at a time when the July economic data drop on Monday showed China’s economic recovery has slowed to the weakest rate this year.
Debt risks are rising consumer demand is weakening along with factory output and the regulatory crack down is crushing confidence just as the economy has lost steam.
The continuing crackdown curbing red-hot property prices, for example, has markets on edge and corporate credit fell further on Friday with the news that heavily-indebted Evergrande had been rebuked by regulators.
The Hong Kong dollar sits close to its weakest in a year and a half, also suggesting money is moving out of the city and out of China itself.
