If US investors are experiencing a sell-off, then Chinese stock investors are experiencing a fire sale akin to the Great Recession. The Hang Seng China Enterprises Index lost (-9%) of its value last week, falling to its lowest level since 2008. Chinese companies listed on U.S. exchanges fared even worse, dropping (-21%) on one day alone. The market drop is a negative response to the events at China’s twice-a-decade party congress, where President Xi Jinping stacked the country’s leadership ranks with allies, opening the door for the party to exert greater state control.
Ordinarily, these huge dips represent an overreaction and a big buying opportunity, but among funds that are investing in China, there is little appetite for increased investment. The Chinese habit of propping up unprofitable enterprises run by government cronies, has made it hard to predict future earnings and growth, core drivers of building stock value. Adding to the negative outlook is an initiative by the U.S. and its global allies (Europe, Canada, Japan, South Korea and Australia) to limit shipments of chip production equipment to China, cutting semiconductor technology out of China.
Piling on to the gloomy expectations about China’s future is the huge debt crisis in the country’s real estate sector, most prominently led by the huge Chinese development company Evergrande, whose finances are a few rungs below bankruptcy at this point. People who have bought homes from the real estate giant are now refusing to pay their mortgages, caused by chronic construction delays. In the U.S., structural problems like these would be easily handled, but real estate and property sectors makeup 25% of China’s total GDP, making them too big to fail.