China’s Erratic Policies Terrify Investors

ByRichard C. Sloan

May 6, 2022

ON 3 MAY Chinese stock investors woke up to news that Jack Ma, the co-founder of e-commerce giant Alibaba, had been arrested on national security charges. Or so many of them thought. State media reported that a technician surnamed Ma had been detained in Hangzhou City. The description seemed to match that of the billionaire tech mogul, whose companies are based in Hangzhou and have come under regulatory assault over the past year. It quickly turned out that the speculation was wrong (Ma is a common surname in China). But not before Alibaba shares fell 9%, temporarily wiping more than $25 billion from the company’s market value.

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The incident shows how fragile market sentiment has become in China. Beijing’s unpredictable and often shocking policy deviations in recent years have made it all the more conceivable that the country’s most prominent entrepreneur could suddenly be accused of attempting to “divide the country and overthrow the state”. President Xi Jinping’s increasingly ideological campaign to rid China of the Omicron variant of covid-19 threatens to strangle economic growth this year. His unwavering support for Russia, even as Vladimir Putin commits war crimes in Ukraine, has further fueled the perception that the country’s leaders, once known for their pragmatism, are wavering.

The shift was punctuated by somber comments from leading pundits who, until very recently, remained optimistic about China. Stephen Roach, the former Asia chairman of Morgan Stanley, a bank, has long championed China policy. But in a recent article by Project union, an online publication, he said “China’s cushion,” the economic powerhouse that helped the world through the global financial crisis in 2008, had “deflated.” Shan Weijian, General Manager of CAPa Hong Kong-based private equity firm, recently told investors that China’s economy “right now is in the worst shape in 30 years,” the FinancialTimes reported.

Some use harsher language and are punished for it. Joerg Wuttke, the head of the European Chamber of Commerce in China, hinted last week in an interview with a Swiss website that China’s zero-covid strategy has put many policymakers in “self-destruct mode.” Hong Hao, an outspoken analyst at Bank of Communications, a state lender, recently had a Chinese social media account frozen after posting a negative outlook on the economy. He has now left the bank.

Much of the darkening sentiment has focused on Mr Xi’s covid strategy. The closure of Shanghai, the commercial and financial center of China, seemed unimaginable just a few months ago. But the city of 25m has been under strict confinement since April 1. Covid outbreaks in Beijing and other cities have prompted targeted shutdowns. A virus testing regime is quickly becoming part of everyday life.

The costs of controlling the spread of Omicron become apparent. Factory activity has been badly hit and strains on transportation and logistics are spilling over into global supply chains. The central government has mandated that it must strike its GDP growth target of 5.5% but many analysts have downgraded their outlook for economic activity in the country this year. Some economists believe that real growth in China in 2022 will only reach 2% (even though official statistics say otherwise).

Markets reflected the gloomy sentiment. The Shanghai Composite Index is down about 7% in one month. It fell below 3,000 points at the end of April, a threshold it had not crossed since July 2020. Investors dumped yuan-denominated securities at a record pace (see chart).

The state is fighting against the fall in confidence. At a meeting on April 29, the Politburo, a top decision-making body, pledged to increase infrastructure investment this year to spur growth. The executives also said they would standardize regulations and support the development of internet-consuming companies, such as Alibaba and Tencent. The statement marks the first strong sign of central support for these groups since a regulatory crackdown began in 2020.

Politburo memos are usually released after Chinese markets close. This fell while stocks were still trading, sending stock prices soaring for some tech groups. This was likely done intentionally in hopes of a positive market response amid a growing sea of ​​doom, sadness and panic.

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