Chinese Premier Xi Jinping this year launched a crackdown on the country’s burgeoning private sector, targeting tech giants such as Alibaba Group and Tencent Holdings. Its authoritarian approach risks scaring international investors and undermining the country’s attempt to compete with the United States for economic superpower status.
Despite talks about the decline of the United States after the withdrawal from Afghanistan, its stock market still outperforms all of its rivals.
Major benchmarks such as the S & P500 and the Nasdaq Technology Index have experienced a record bull run that has lasted for more than 12 years.
The United States now has five trillion companies, led by iPhone maker Apple with an incredible market capitalization of $ 2.46 trillion, followed by Microsoft at $ 2.22 trillion and Amazon at $ 1.76 trillion. . Alphabet, owner of Google ($ 1.89 trillion) and Facebook ($ 1.07 trillion) round out the trillion dollar club.
The U.S. stock market is up 21.06% year-to-date, according to MSCI, but following a recent crash, China is down 12.18% in 2021.
Investors who expected rapid growth in Chinese stock prices are now thinking again.
Prime Minister Xi Jinping’s antitrust campaign sparked the recent crash, which wiped out more than $ 1 trillion at Chinese tech giants like Alibaba Group and Tencent Holdings.
An overhaul of state regulation of the private education sector has also affected investor morale.
Many see it as a sign that capitalism will be crushed in the country.
The Communist Party’s measures to “prevent the disorderly expansion of capital” have shaken investor sentiment, said Jason Hollands, managing director of Tilney Investment Management Services. “It is a reminder that investors cannot be complacent about political risk when investing in emerging markets, especially countries with authoritarian regimes.”
Hollands said China has adopted the traps of a market economy, but in practice it is “bogus capitalism.” “Scratch under the thin veneer and China is an illiberal Marxist state where the priorities of the Communist Party take precedence. The interests of international investors rank low in the pecking order. “
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Investors shouldn’t completely abandon the world’s second-largest economy, which will present opportunities for Western exporters, but Hollands cautioned, “Understand the risks. “
He said the crackdown on the private economy risked leaving China permanently stranded as a middle-income nation.
The country’s workforce is already shrinking due to its one-child policy and India is now in a better position to grow. “India’s rapidly growing population means it is expected to overtake China as the world’s largest country. It is a democracy with an independent judiciary, ”added Hollands.
Dale Nicholls, portfolio manager of the China Special Situations fund, said China has already launched crackdowns, including one in 2018 aimed at reducing the number of young players.
Tencent fell 50% as a result, but recovered quickly and Nicholls said the recent drops could be a buying opportunity for brave investors.
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China needs to create a stable investment environment to support growth and policymakers are looking to calm the markets, Nicholls said. “Government regulation is a constant in China and every investor must integrate it into their risk / return framework,” he said.
As a measure of US stock market power, companies in the country still make up 60% of the global stock market. This compares to a paltry 4.1% for Chinese companies.
Peter Garnry, head of equity strategy at Saxo Bank, said the United States remains the stock market to beat. “It will continue to dominate many high growth technologies such as cloud computing, cybersecurity, digitization, semiconductors, machine learning and biotechnology. “
The big worry is that US stocks now appear relatively expensive after years of growth, and investors may be more exposed to US fortunes than they realize. A US stock market crash is also possible.
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