Chinese Investment Markets Reveal Their Fatter Tails

I’m truly shocked to watch events unfold in the Chinese investment markets. Throughout the year, the Chinese Communist Party (CCP) progressively restricted freedoms of its citizens, plummeting share prices for some of the largest companies in the world. While this not-so-naked power struggle between economic and political factions is as old as modern societies, it’s nonetheless tragic. This rings especially true for the Chinese population. Their progressively increasing living standards and political freedoms now seem poised to reverse. Unfortunately for investors, the CCP’s consolidation of power reveals that the country remains far more centralized than believed. Hence, it’s more dangerous—and expensive—which bodes poorly for portfolios and global growth.

Crackdowns and crack-ups

It’s been a wild year for investors in China. First, the CCP cracked down on Chinese technology companies. What started with a breakup of Jack Ma’s Alibaba, spread to other companies and sectors. Under the guise of cleaning up anti-competitive practices, the CCP is exerting its influence over some of the largest companies in the world, imposing crippling fines and threatening to dismantle them. Equity values plunged in response.

Many prominent Chinese technology stock prices fell dramatically this year. Source: Koyfin

More recently, the property developer China Evergrande Group (Evergrande) made headlines. Heavily indebted, it’s teetering on the edge of default. Evergrande’s eyepopping debt level have some worried about systemic consequences, especially since it’s not alone. Here too, changing government policies catalyzed concerns. The new “three red lines” policy impedes property developers from refinancing their debt, a common practice upon which many built their businesses. With few other options, liquidations seem likely as reflected by share prices.

Chinese real estate developer stock prices also fell recently. Source: Koyfin