What happened
Shares of Chinese stocks are getting hammered across the board on Monday, and for once the cause isn't interest rates. The market is worried that a new term for President Xi Jinping will lead to challenges for Chinese companies and stocks.
There were some very notable moves today from Daqo New Energy (DQ -0.52%), Kanzhun Limited (BZ 0.80%), Futu Holdings (FUTU -3.83%), Baozun (BZUN -3.33%), and Weibo (WB -0.61%).
| Company | Max Decline Monday | Decline at 11:45 a.m. ET |
|---|---|---|
| Daqo New Energy | 15% | 8.2% |
| Kanzhun Limited | 31.6% | 24.5% |
| Futu Holdings | 19.9% | 12.9% |
| Baozun | 14.5% | 6.8% |
| 18.2% | 13.6% |
Data source: Google Finance.
So what
President Xi, who has effectively won a third term, could keep up pressure on business operations in China. The Chinese yuan fell as a result and is near a 14-year low.
Investors are broadly worried that Xi will continue to unwind decades of business-friendly policies in China. That could hurt U.S. companies that outsource manufacturing to China, but it could hurt the Chinese economy as well.
One news item that had investors worried was a report that Tesla is cutting the price of vehicles sold in China by up to 9%. That's a sign that the country's economy could be slowing.
Investors and business leaders have been concerned about China's direction in recent years because leaders are taking more control over the country's businesses. Tech leaders have been pushed out, growing industries have been shut down almost overnight, and China has been more internally focused, shutting out some Western countries. If this shift continues, U.S. investors might not see the kind of returns they hoped for.
Now what
It's simply unknown what the impact will be for a lot of companies. That's why we're seeing a broad sell-off in Chinese stocks from tech to energy. It's a risk-off trade.
I think investors would be wise taking a step back and looking at the overall risks in China. It's not just the economy and government policies to worry about, but also what investors actually own. Shares of Chinese companies can't be sold in the U.S., and investors often own a derivative of value, not a security in the underlying company.
There's a lot of risk in China, and that's a reason I've largely avoided investing in the country. You never know when a shoe is going to drop, and the market's reaction today indicates that investors think there will be big changes there, which might not be good for stocks.
