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Shares in Chinese Companies Crash After Xi Jinping Stacks Party With Allies
The Nasdaq Golden Dragon China Index fell to lowest level since 2013
By Vicky Ge Huang and Michelle Chan
U.S.-listed Chinese stocks plunged to their lowest level in nearly a decade, losing tens of billions of dollars in market value on Monday, one day after President Xi Jinping secured a third term as leader of the Communist Party.
The Nasdaq Golden Dragon China Index, which tracks dozens of Chinese companies listed on American exchanges, fell more than 14% to its lowest close since April 2013, erasing $73.4 billion in market cap since Friday’s close through Monday, according to Dow Jones Market Data.
The selloff followed a rout in Chinese stocks in Hong Kong and mainland China overnight with the Hang Seng Index recording its biggest one-day decline since the global financial crisis.
Stocks in the U.S., by contrast, continued to rally on encouraging corporate earnings results and the hope the pace of Federal Reserve rate increases will soon moderate. The Dow Jones Industrial Average rose more than 400 points, or 1.3%, to its highest level in six weeks. The S&P 500 gained 1.2%, while the tech-heavy Nasdaq added 0.9%.
The frantic selling came after Mr. Xi consolidated his control over the ruling Communist Party, stacking the leadership ranks with loyalists and clinching a convention-defying third term.
Foreign investors dashed for the exit. The American depository receipts of the five largest Chinese stocks lost more than $52 billion in combined market value.
Chinese internet and technology stocks were hit especially hard. Alibaba’s ADRs traded below $68, the price at which the e-commerce giant went public in its blockbuster 2014 initial public offering. Baidu, JD.com and Pinduoduo also suffered double-digit percentage losses.
“The risk premium of China increased tremendously among the minds of global investors,” said Vivian Lin Thurston, a portfolio manager at William Blair Investment Management. She said the selloff on Monday reflects investors’ skepticism over China’s future economic policies under the rule of Mr. Xi and his party loyalist allies, whom some analysts deem less pro-business.
The absence of Chinese Premier Li Keqiang and other pro-growth technocrats in the seven-person Politburo Standing Committee, China’s key decision-making body, has also disappointed many Western investors, according to Jason Hsu, the chief investment officer at Rayliant Global Advisors, which manages multiple active ETFs that focus on Chinese investment.
“Now that President Xi is completely in charge, his actual policy priorities remain a mystery,” Mr. Hsu said. Mr. Hsu said he is investing in Chinese shares that have exposure to state-owned enterprises, which are expected to receive government stimulus.
China’s heavy emphasis on national security during the party congress, and its firm opposition against Taiwanese independence, have led to a more gloomy outlook for cross-strait relations that is reminiscent of the Ukraine-Russia war, said Dan Niles, a senior portfolio manager at hedge fund Satori Fund.
The congress meeting came after a punishing year for the Chinese economy. While China’s gross domestic product grew more strongly than expected in the third quarter, Mr. Xi’s strict zero-Covid controls have led to city lockdowns and factory shutdowns. Last year, a series of regulatory crackdowns targeting sectors from technology to for-profit tutoring caused widespread investor losses. And a move to deleverage the property sector has spurred a yearslong downturn in the real-estate sector, compounding investors’ financial pain and the country’s economic woes.
Investors had been hoping for a potential relaxation of Beijing’s restrictive zero-Covid policy, which has taken a toll on Chinese companies and crippled economic activities. Now, they must readjust for a leader that gives priority to Communist ideology and national security above economic growth, according to Leland R. Miller, chief executive of China Beige Book International.
“And if that means continuing tech-sector crackdowns, so be it. If that means continuing at lower levels of growth and not stimulating the economy, so be it,” Mr. Miller said.
One hedge-fund manager who has been bearish on China attributed the selloff to the hard-line makeup of the Standing Committee and the lack of diversity of views among the party’s leadership. He and other investors also cited as a reason for concern the unceremonious departure of Hu Jintao, Mr. Xi’s predecessor, during the closing session of the congress on Saturday, when he was helped out of his chair and led out of the hall.
Taken together, the manager said, “this moment will be marked very negatively in Chinese history.” He also said he has sold short more offshore renminbi—yuan that circulates outside of mainland China—and increased bets against Hang Seng-listed companies and H shares, the shares of mainland Chinese companies listed on the Hong Kong stock exchange and denominated in Hong Kong dollars.
Shares of casino operators, many of which hold properties in Macau, also suffered sharp losses. In 2019, Macau supplied nearly 70% of the revenue for Wynn Resorts and Las Vegas Sands Corp.
Some investors are betting that prices will recover. Options bets on the KraneShares CSI China Internet ETF surged, with many placing bullish wagers that give traders the right to buy the ETF at $27 by Dec. 16.
BlackRock Inc., the world’s biggest investor, said it believes China is entering a lower growth phase and that Chinese assets will now warrant a higher risk premium, while staying neutral on Chinese equities and bonds. The asset manager predicts the Chinese government will become more assertive in building out its own technology and imposing greater scrutiny on companies.
“The congress brought little evidence to change our view of a sluggish near-term growth backdrop,” the firm wrote in a paper released Monday.
—Angel Au-Yeung, Juliet Chung, Hannah Miao, Alexander Osipovich and Eric Wallerstein contributed to this article.
