Are Chinese Stocks Becoming Uninvestable as They Crash Yet Again?

While U.S. stock market futures point to a slightly lower opening on Aug. 16, Chinese stocks are down sharply. NIO is down over 4 percent while Xpeng Motors (XPEV) is down over 3 percent. Alibaba (BABA) stock is also down about 2 percent. Why are Chinese stocks dropping and will they go back up?

Chinese stocks have been weak this year. The performance of Chinese IPOs has also been tepid. RLX Technology (RLX) and DiDi Global (DIDI) were listed in 2021 and have tumbled badly after the IPO. Many of the Chinese companies looking to list in the U.S. have shelved their plans.

Last week, China announced a five-year plan that called for greater control of the economy. Over the last five decades, China has gradually opened up its economy, which has helped Chinese consumers and companies.

Foreign companies have also received more access to the world’s second-largest economy. Some of the leading U.S. companies like Apple and General Motors get a large chunk of their revenues from China. While arguably China has benefited more from the controlled opening up of the economy, U.S. companies and consumers have also benefited.

Meanwhile, under Xi Jinping’s leadership, China has been clamping down on several sectors of the economy. Companies like Alibaba, which have helped increase China’s reputation abroad, have been targeted in a severe crackdown. Just when markets thought that the worst of the crackdown was over, there's the new five-year plan that calls for a broad-based control of the Chinese economy.

Chinese stocks seem to be falling in response to the crackdown. China’s support for the regime change in Afghanistan could also lead to more bitterness in U.S.-China relations. China has sounded a cordial note with the Taliban even though many other countries have been critical of the political changes in the country.

Also, Chinese state media has called for greater oversight of online games. Usually, the state media is the propaganda arm for the domestic as well as the international audience. The calls for greater controls are weighing down Chinese stocks.

U.S.-China ties are set to sour more. One fallout of the bitterness in U.S.-China relations would be Chinese companies listed on U.S. exchanges. If anything, these companies are facing a double whammy. While China has targeted its tech giants on pretexts ranging from national security, monopoly, and economic stability, they also face the wrath of U.S. regulators.

U.S.-listed Chinese companies would face greater scrutiny. Lawmakers would have to at least give a signal that they are trying to protect the interest of U.S. citizens who have lost billions of dollars amid China’s crackdown.

Many people think that Chinese stocks might be getting uninvestable now looking at the crackdown in China. Unlike the U.S. where companies can defy government rules, Chinese companies have to surrender to the rules set by the government.

Even Cathie Wood has been selling the Chinese stocks that she was holding as she sees a valuation reset for Chinese names. From a valuation perspective, a lot of Chinese companies including BABA and XPEV look attractive.

However, these companies are caught in a crossfire in the new Cold War between the world’s two largest economies. The geopolitical risk of investing in Chinese companies has increased multifold and the stocks are only pricing the higher risk.