Another Five Years of President XI
If you follow the Chinese ADR sector at all, then this past Monday was a bit of an eye-opener. Chinese stocks fell across the board both in Asia and in the United States. The Hang Seng Index in Hong Kong tumbled to its lowest price in thirteen years. That’s right, lower than at any point during the COVID-19 crash in March 2020. The lowest it has been since the Global Financial Crisis in 2009. If that doesn’t tell you how dire investors think things are in China, I don’t know what will. So what set this all off?
Over the weekend, President Jinping Xi was named the leader of the Chinese Communist Party for a third straight tenure. This is surprising because no President had ever served for longer than two terms. The decision is truly precedent-breaking and speaks volumes about how much power Xi really has in China. But, if Xi was already in power before this, why did stocks sell off so violently following the announcement?
It’s no secret that Xi has been wielding his power over the past couple of years. In his mind, the tech giants like Alibaba (NYSE: BABA) and Tencent (OTC: TCEHY) has grown to be too powerful. Xi wanted to implement restrictions on the tech sector and distribute this massive difference in wealth a little more fairly. Ongoing crackdowns and increased regulations have caused headaches for investors and the stocks to hit multi-year lows. But that’s not all.
Zero-COVID and its Impact on Stocks
Another reason why these stocks sold off is that it surely means more restrictions from Xi’s Zero-COVID policy. The same policy has already directly impacted companies like Nio (NYSE: NIO) and Tesla ($202.64|0.38%). With no end to the novel coronavirus in sight, China continues to take one of the strongest stances in the world against the virus. Investors are weighing what further lockdowns would mean for business operations.
Another reason why investors are souring on China? Xi reshuffled his inner circle and leadership team. He has already replaced several members with people that are fiercely loyal to him and the party. This likely means that anything Xi believed in before will garner even more support from those around him. Zero-COVID and tech crackdowns are reasons to remain bearish on these stocks.
The Chinese ADR Sell-Off was an Overreaction
Any time you see a major shift one way in the markets, it is usually an emotional overreaction. Truth be told, Xi’s always been a pro-economic growth President that places economic growth in China as a top priority. He has repeatedly backed domestic companies in sectors like electric vehicles, a market he has openly said he wants to be better than in America.
So while some investors are greeting Xi’s third term as a negative, I’m taking this opportunity to look at some cheap stocks. You’ll need a bit of a risk appetite here, but stocks like Nio, PinDuoDuo (NASDAQ: PDD), and JD.Com (NASDAQ: JD) are well oversold. Remember, company performance for these stocks has been overshadowed by general investor sentiment for the current situation in China. Be greedy when others are fearful, and right now, Chinese stock investors are petrified.