China Markets: a Rough Ride

The MSCI China ETF is down 16.28% year-to-date while the S&P 500 is up 17.18%

Yesterday's blowout earnings reports of tech giants Apple, Microsoft, and Alphabet/Google captured the headlines, but your humble blogger suspects that the most significant financial news was the deepening slide in China's stock market.

A selloff in Chinese technology stocks accelerated on Tuesday, as investors unnerved by China’s widening crackdown on Internet companies and other industries sold down their holdings of many popular stocks.

The Hang Seng Tech Index in Hong Kong, which includes stocks such as Tencent Holdings Ltd. TCEHY -2.13% and Alibaba Group Holding Ltd. BABA -2.97% , tumbled 8%, registering its third day of declines. The city’s flagship Hang Seng Index dropped 4.2%.

In mainland China, the CSI 300 benchmark retreated 3.5%. The Chinese yuan weakened against the dollar, with the offshore currency trading beyond 6.50 yuan per dollar, versus a previous close of 6.4834, according to FactSet.

Observers outside China universally attribute the contraction to regulators' attempt to rein in the private sector.

“National security considerations trump everything else,” including growth, in Mr. Xi’s administration, said Diana Choyleva, chief economist at Enodo Economics in London.

With the recent slew of actions, business is being brought to heel by the Chinese government and the Communist Party, said George Magnus, an economist who is a research associate at Oxford University’s China Centre.

“It’s about systemically trying to establish the authority of the state, or of the party, over the private sector—which effectively has been at the cutting edge of China’s economic eruption for the last 20 or 30 years,” he said. “To the extent it stifles the private sector, and private-sector innovation, I think it will cost China in years to come.”

President Xi Jinping: His "Thought on Socialism with
Chinese Characteristics for the New Era"
are written into the Constitution (BBC),

Despite the tremendous growth opportunity, your humble blogger has steadfastly avoided investing in Chinese stocks. While there are honest Chinese business persons--and I personally know some--there are too many Chinese businesses that will break agreements, steal trade secrets, and falsify their financial statements.

This year another risk has been made plain for everyone to see: the Chinese government's assertion of its supremacy over a private sector over which it was losing control. China's rise to the top rank of global power rested upon the explosion of entrepreneurship, wealth, and technology triggered by the loosening of command socialism. It is clear that the government thinks deregulation has gone too far.

The government prefers to have a compliant private sector, even at the expense of innovation. While the Party is reasserting its power, the world's economies and markets, not just China's, will be in for a rough ride.

[Update: 10:30 a.m. PDT - bold added]

Fighting the Fed, or Washington, is usually a losing game—but betting against Beijing’s fast-moving, often opaque regulatory apparatus in Xi Jinping’s new era of centralized control is suicidal...

The country’s opaque authoritarian system allows swift and forceful action, but that also means investors face greater uncertainty—and very little recourse when policy winds blow against them. Instead of trying to argue their case in courts or the media, Chinese tech companies often thank regulators after being punished.