Misunderstanding and the Cold war: Reasons why the Chinese stock market plummeted

Naturally, the recent happenings regarding tech companies and charges in policies spark anxiety among investors, especially after the stock price crash. 

Wang Tao Tao, a prominent Chinese blogger who specialises in geopolitical issues and venture capital analysis,  wrote a blog yesterday on this. His opening remark was “I am not a stock expert, but I cannot stand the current blind panic. This kind of roller coaster of emotion that people/ investors are going through is not good for the capital market.”  

He first clarified the three elephants in the room – Didi, crackdown on online education and food delivery riders – to avoid misunderstanding the national policy.  

1. Didi – Why did the Chinese government conduct a security review?

Didi did not take the advice from the Chinese regulators and insisted on going public in the US during the period when “Data Security Law of the People’s Republic of China” was yet to be implemented.  

This is a serious issue especially given the current tension between the US and China. Didi’ move is seen by the government as an act of blutent disobeying the government . 

China is not really against tech companies as a sector; it is more of a national security problem at hand that the state is managing. 

2. Online education – Why is the government cracking down on it? 

This is obvious. Many people may not know but enrichments and tuition outside the formal education system are not regulated in China. The market itself is quite chaotic. 

Parents are pressured to send their children to tuition, hoping to increase their chances of educational success. For profit tuition centres allegedly focus on teaching the students/ children how to game the education system. 

The cost to be “in the game” also causes a heavy financial burden to the parents. The short term focus of online education companies hinders long term growth of the children. 

All this adversely impacts educational equality, development of national education, and creates unnecessary anxiety and stress for parents and children alike. 

Students from less well-off provinces and families in China are marginalised when it comes to standardized national examinations, and exaggerate inequality. 

Education is one of the most important channels for society mobility in China. Since March, the government had been sending signals that it would be reforming the industry.Hence, the crackdown is not a surprise to many. 

3. Food delivery riders: Why protect their welfare?

Again, this is simple. With the boom of food delivery, there is an increase in the number of people becoming riders. However, the labour rights and protections of the workers are largely overlooked, leading to many becoming precarious workers. 

So, disputes between the platforms and their riders are common. This problem needs to be handled in order to regulate the market and ensure that voices of the working class are heard.

So why did the stock price crash, even though the reasons for the crackdown above were so obvious? 

The author elaborated on 2 main reasons: 

Firstly , so-called “high-quality” assets are facing discounts due to potential risk and this lead to financing problems 

Internet platforms and online education companies have always been regarded as high-quality assets and have told all kinds of stories to get investors to be interested in them. 

Investors are aware of the policy risks, and with the adjustment in policies and regulations, there has been a price discount. However, what is causing the crash is the discount on the valuation and the cascading effect. Imagine that the original education tech valuation asset price is 100 yuan. Now with a discount, the valuation goes down and there is a cascading downward effect when investors start sharp selling. Funding dries up, and this pushes the stock price down even further. It is like a run on a bank. 

Secondly, the US-China Cold War affecting the capital market 

The author explains that the increasingly strong Cold War effect will inevitably have an impact on Hong Kong and China stocks –  which combine Western capital and Chinese companies. 

Since July 2020, the United States has introduced a slew of measures to force Western capital and Chinese companies to decouple. 

The events and policy decisions above make it even easier for Western capital to further discount China’s asset price. 

And many Chinese companies are pumped with Western capital. If China and the US were to collide at the Cold War front, Western capital will have to reduce their integration with Chinese companies, and Chinese companies will be forced to reduce integration with Western capital. 

These Companies will take a hit financially in the short and medium term. Chinese companies will move towards the Hong Kong stock market, and Hong Kong stocks will spread to Shenzhen/ Shanghai. There will be negative knock-on effects on both the Hong Kong stock market as well as the Shenzhen/ Shanghai stock market – as the cold war effect and decoupling takes hold – but it should only be temporary. 

In his original blog, the author predicted as early as April- as the cold war continues to rise, the market where Hong Kong stocks and Chinese companies are closely integrated with Western capital will have to encounter the severe impact. This will eventually affect the A-Shares in Shenzhen/ Shanghai. This is a risk, but I believe that the problem can be overcome – within the year.

He ended his blog with this quote from former US Secretary of Defence Weinberg “ The Cold War is the tempering of a great nation towards maturity, and every generation of young people should experience at least one Cold War. ” 

Poignant, and df course, we are all waiting with bated breath when this will end.