Investors are fleeing Chinese stocks. Buy when others are fearful?

What happened?

It’s a total bloodbath for Chinese stocks today. 

The Hang Seng Index fell by 6.4% to a 13-year low. The Hang Seng China Enterprises Index, a benchmark of Chinese stocks listed in Hong Kong, plunged 7.3%. 

Alibaba fell close to 20% to a low of $58.01 in the first hour of US trading. Chinese EV makers like NIO and Xpeng also saw price declines of close to 20%.  

It seems like investors who were awaiting some good news to come out from the Communist Party Congress over the past week were sorely disappointed. 

Why did Chinese stocks fall?

#1 – Xi Jinping gains more control

In case you have not been following the Communist Party Congress, the one thing that has become clear is that President Xi Jinping has cemented his power.

Apart from securing a third term as President, Xi also filled the party’s top ranks with those who are seen to be loyal to him. 

One key appointment in the Standing Committee of the Politburo includes Shanghai party boss Li Qiang, also a trusted protégé of Xi. 

The appointment of Li was seen by analysts as rewarding loyalty above everything else, including the ability to drive economic outcomes. 

After all, Li’s performance was previously put in doubt after his delay in implementing a lockdown in Shanghai was seen to have led to a wider outbreak.  

#2 – No change in economic policies

In Xi Jinping’s opening speech, it became clear that there would be a continued emphasis on zero Covid.

This might make it hard to spur a strong economic recovery. 

There was also a focus on common prosperity, which would mean less support for private enterprise including tech companies like Alibaba. 

Also, there were expectations by some investors that there would be policy measures to support the economy, including the embattled property sector, during the Congress.

Unfortunately, there were no signs of these stimulus measures over the Congress. 

#3 – Economic data still paints a bleak picture

China had delayed releasing its third quarter GDP data when the Congress was in progress.

When it was subsequently announced that its economy grew 3.9% during the quarter, investors briefly cheered the better than expected datapoint.

However, the positive sentiment proved short-lived as other economic data that were released on the same day painted a less positive picture. 

Retail sales growth slowed to just 2.5% in September, below estimates of 3%.

It would appear that the Covid-related lockdowns have really impacted consumer sentiment. 

The caution on the Chinese economy was not helped when Tesla cut its prices for the Model 3 and Model Y electric vehicle in China by up to 9%.

This follows Elon Musk’s comments at Tesla’s results last week that China was already in “a recession of sorts”. 

What would Beansprout do?

The Chinese market is cheap and is becoming cheaper by the day.

When measured against the S&P 500, the HSCEI is at its lowest level since 2001. 

This actually says a lot about how much the Chinese market has come down by, especially since the S&P 500 is also down by 21% so far this year (as of 21 October).

While the valuation on Chinese stocks now looks even more attractive, we wouldn’t be the one buying when everyone is fearful at this point in time. 

After all, we’re looking out for any signs of China’s re-opening to change our view on the market. And there are no signs of that happening as yet. 

Instead, this is what we'd do with our portfolio with rising uncertainty.