China’s Plunging Market Has Become a High-Risk Bet on Xi Jinping

(Bloomberg) — China’s lurch toward one-man rule has made it more important than ever for investors to align their portfolios with the priorities of President Xi Jinping. Some are deciding it’s not worth the trouble.

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Chinese stocks tumbled by the most since 2008 in Hong Kong and the yuan hit a 14-year-low after Sunday’s confirmation that Xi’s policies of stronger state control over the economy and markets will continue unchallenged for years.

Unlike in places like the US or UK — where dramatic market reactions can force policy pivots or even overthrow entire governments — it’s becoming apparent that investors are only an afterthought for Xi. That narrative was reinforced by Beijing’s move to delay the release of a raft of economic data without explanation, and risks further alienating money managers who are already leery of Chinese assets.

Investors have to decide if Xi’s policy objectives — such as common prosperity and dual circulation — are palatable, according to Hao Hong, chief economist at Grow Investment Group. “One has to examine whether these new sets of values align with your own” investment goals in the years ahead, he told Bloomberg TV on Monday.

Monday’s market reaction — especially offshore — suggests international investors are becoming increasingly leery of Xi, who has implemented tough curbs on one-time market favorites from Alibaba Group Holding Ltd. to education firms. With a new leadership team packed with his allies, analysts also expect little dissent against Xi’s Covid Zero strategy.

The Hang Seng China Enterprises Index slumped 7.3% — the most since 2008. The gauge trades at a paltry 6.5 times projected earnings, the cheapest since concerns about a hard landing in China spooked global markets in early 2016. The offshore yuan fell to the lowest since it started trading in 2010, while the currency dropped 0.5% in the mainland.

Even better-than-expected growth and industrial production data failed to lift sentiment. A rush to buy protection sent a VIX-like index up 24%. The most-traded option tracking the Hang Seng China gauge was a bearish put that profits if the index falls to 5,000 points — a level that provided a floor during the 2008 global financial crisis. It rose more than 1,000% in value.

“Clearly the market is concerned about the political narratives and imperatives over the data outputs,” said Brian Quartarolo, who trades Asia fixed income and currencies at hedge fund Lighthouse Investment Partners. “Foreign investors looked at the content in Xi’s recent speeches as showing insufficient concern for the pessimistic signal that offshore markets have been indicating.”

On Sunday, Xi said China’s economy is “resilient” and the country’s long-term fundamentals are “sound.” He also promised changes to policy aimed at improving growth, without giving specifics.

Chinese policy making is not known for transparency. Playing that guessing game had never been so costly for investors as in the past two years, with Xi ending China’s days of limitless private sector-growth in favor of state-directed “common prosperity.”

In mid-March, Beijing appeared to heed investor concerns after one of the biggest stock market routs in history. China’s top financial policy committee released a sweeping set of pledges including one to make policy more “transparent and predictable.” But less than two weeks later, the Politburo, led by Xi, published a 114-character readout of its latest meeting — the briefest of the president’s tenure — keeping investors in the dark again.

The strong-man risk in China and its implications have been a long-standing problem for some global funds. Some of the most extreme cases included Boston-based Zevin Asset Management cutting its China exposure to zero, or the manager of a $184 billion public pension fund in Texas halving its target allocation to the country’s stocks.

Onshore markets fared relatively better on Monday, with the CSI 300 index of yuan-denominated stocks losing 2.9% even as overseas funds sold a record $2.5 billion worth of the shares. Mainland-based investors continued their buying spree of Hong Kong stocks with a net $852 million of purchases via trading links with the city.

What’s clear is anyone hoping Xi would usher in a more benign investing environment in his second decade in power is getting a painful reality check.

“The market is concerned that with so many Xi supporters elected, Xi’s unfettered ability to enact policies that are not market friendly is now cemented,” said Banny Lam, head of research at CEB International Investment Corp.

–With assistance from Jeanny Yu.