2022 has proved to be a testing year for China as the Shanghai Stock Market suffered a fall of more than 20 per cent between January and late April. Likewise, the yuan has suffered a sharp fall against the USD in recent days, signifying that further pullbacks may be on the way.
Due to a cocktail of regulations, geopolitical tensions, and the COVID-19 pandemic, investors have remained fearful of Chinese stocks and firms from China with listings in the US.
“Recently, the biggest drop in Chinese shares since the 2008 crisis was seen in US trading,” explained Maxim Manturov, head of investment advice at Freedom Finance Europe. “The main reason for the collapse was investor fears over the delisting of some companies and the threat of a Chinese military conflict with Taiwan. The Chinese regulator has instructed its tech giants (Alibaba, Baidu, JD, Pinduoduo, NetEase) to disclose detailed auditing information to avoid delisting in the US.”
“The country has a new record disease rate for coronavirus, so the authorities impose a lockdown regime in entire regions. What matters to investors is that China has no inflation problems like the rest of the world, which makes it possible to count on a relatively soft policy from the local central bank in 2022,” Manturov added.
China’s COVID-19 cases have climbed to new highs that haven’t been seen since Our World in Data first began its records. Given China’s sprawling population, the threat of more infections is severe. However, it’s worth noting that data suggests around 88 per cent of the population are fully vaccinated against the virus.
As a result, indexes in mainland China have been leading losses as wider Asia-Pacific markets have continued to fall.
The Shenzhen component fell by more than six per cent in late April to 10,379.28, whilst the Shanghai composite fell over five per cent to 2,928.51 as harsh lockdown measures were imposed in the city to stem the spread of the virus.
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“It’s no surprise, and it makes all sorts of logical sense that the market should be concerned about the Covid situation because that impacts economic activity. It’s impacting earnings potential for many parts of the market,” noted Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs.
The threat of US delisting
Compounding China’s struggling financial outlook is the threat facing stocks that have been listed in the US in the face of new regulatory rules. Alibaba, Baidu, Punduoduo, JD.com and Tencent have all struggled with fresh pressure from watchdogs.
As we can see in the case of Alibaba, the company’s stock has declined 26.63 per cent since the beginning of 2022, and there’s potential for further losses should regulations continue to tighten, or the demand for added transparency conjures unexpected results.
More recently, we saw Weibo, a Chinese social networking platform, become the latest major firm to find itself added to the US Securities and Exchange Commission’s delisting watchlist for failing to comply with the rules laid out by the commission’s Public Company Accounting Oversight Board, with the rules requiring foreign firms listed in the US to allow their books to be audited.
Likely, investor fears in the wake of the threats against Weibo’s status on Wall Street will continue to spread across more Chinese stocks in the US, with firms at risk of finding themselves added to the watchlist or even facing a full delisting.
Despite investor fears negatively impacting US stocks in the short term in the wake of COVID-19 return to China, rebounds have since taken place as investors sought to buy into safer options.
Geopolitics threaten further downturns
Although Russia’s war in Ukraine has profoundly impacted global stocks, the boiling over of tensions between China and Taiwan may compound market downturns over the coming months.
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Writing for Forbes, John Markman suggested that China may use the Russian invasion as a form of justification to reclaim Taiwan.
“When Russia invaded Ukraine on February 24, the geopolitical calculus changed. Vladimir Putin saw an opportunity to grab a resource-rich country and further Russia’s status in the east. Xi Jinping, President of the People’s Republic of China, now sees an opportunity to reunify China with Taiwan, the semiconductor capital of the world,” Markman said.
These mounting threats to China’s publicly listed companies may mean that investors should exercise caution in purchasing stocks, even despite the discounted prices.
Western markets should also view China’s problems as a cautionary tale as the COVID-19 pandemic disrupts global economies.
For investors, it’s essential now more than ever to continue to review all factors associated with the stocks that are available to buy and the geopolitical climate that surrounds them. With the threat of the pandemic and further conflict as strong as ever, it’s reasonable to expect further volatility in 2022.
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