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Investors flee China (Axios Markets)

6 November 2022

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Axios Markets title: 1 big thing: Investors rethink giant bet on communist dictatorship
By: Matt Phillips
Date: 25 October 2022

Global capital fled China en masse yesterday in the aftermath of Xi Jinping’s quasi-coronation as the sole power in charge of China, Matt writes.

Why it matters: Market moves suggest investors were surprised by the extent to which Xi’s elevation signaled a coming period of conflict with the West — and a backdrop that could make it increasingly difficult for investors to extricate themselves from what’s been the most important growth market for decades.

  • Investors seem to be getting out now, while the getting is good.

State of play: A violent selloff hit Chinese markets yesterday, as a riptide of capital rushed out of the People’s Republic.

  • Hong Kong’s Hang Seng index, traditionally the venue of choice for foreign investors in Chinese equities, plunged 6.4% — its worst drop since the 2008 financial crisis.
  • China’s currency hit its weakest level against the U.S. dollar in more than 14 years (see below).
  • Goldman Sachs’ index of Chinese ADRs — U.S.-listed securities tied to shares of some of the largest Chinese companies — collapsed by 15%.

The backstory: In 1978, Chinese leader Deng Xiaoping launched China’s “reform and opening” process, aimed at reversing the economic and political chaos of former Party Chairman Mao Zedong.

  • As a result, China’s ruling Communists shifted to a political system that relied on retirements and term limits, while tapping politically moderate technocrats to manage the country’s economy and its links to global financial markets.
  • The system generated enormous prosperity, turning China into an engine of global economic growth — and lifting roughly 800 million Chinese out of dire poverty.

Yes, but: That era effectively ended over the weekend, as Xi Jinping not only won a historic third term as party leader — but also removed the few remaining market-friendly technocrats that served on the powerful Politburo Standing Committee (the seven-man group that basically rules the country).

  • “What this means is that China will face a more difficult international and domestic environment in the future, and that China and Western countries led by the US will face even greater conflict in the fields of geopolitics, high-tech, economy, and trade,” wrote analysts for SGH Macro Advisors in a note to clients yesterday.

💭 Our thought bubble: Xi’s centralization of control of China — along with his “no-limits” partner Vladimir Putin’s brutal invasion of Ukraine — are likely to be two of the largest milestones marking the end of the era of globalization as we know it.

  • Similar to Russia, this could also precipitate a period of pronounced pain for global investors who have poured hundreds of billions of dollars into China.

What they’re saying: “The Great Chinese Liquidation of public and private equity is in full swing,” wrote hedge fund manager Kyle Bass on Twitter.

  • “Today’s 10-20% crash in Chinese shares is just the beginning of the destruction of western capital invested in Chinese companies.” “

Source:
https://www.axios.com/newsletters/axios-markets-fce60259-4466-47c3-9713-9262b03d8fbb.html

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