Chinese stock market crash leaves US as sole global stock market superpower

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Chinese Premier Xi Jinping has launched a crackdown on the country’s booming private sector this year, targeting tech giants such as Alibaba Group and Tencent Holdings. His heavy-handed approach risks scaring off international investors and undermining the country’s bid to rival the US for economic superpower status.

Despite talk of the US decline after the withdrawal from Afghanistan, its stock market still outguns all rivals.

Top benchmarks such as the S&P500 and Nasdaq tech index have enjoyed a record bull market run that has powered on for more than 12 years.

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The US now boasts five trillion companies, led by iPhone maker Apple with a market cap of an incredible $2.46trillion, followed by Microsoft at $2.22trillion and Amazon at $1.76trillion. Google-owner Alphabet ($1.89trillion) and Facebook ($1.07trillion) complete the trillion-dollar club.

The US stock market is up another 21.06 percent year-to-date, according to MSCI, but following a recent crash China is down 12.18 percent across 2021.

Investors who were banking on rapid Chinese share price growth are now thinking again.

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Premier Xi Jinping’s antitrust campaign triggered the recent crash, which wiped more than $1 trillion from Chinese tech giants such as Alibaba Group and Tencent Holdings.

A state regulatory overhaul of the private education sector also hit investor sentiment.

Many see this as a sign that capitalism will be crushed in the country.

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Communist Party moves to “prevent the “disorderly expansion of capital” have hammered investor sentiment, said Jason Hollands, managing director at Tilney Investment Management Services. “This is a reminder that investors cannot be complacent about political risk when investing in emerging markets, especially in countries with authoritarian regimes.”

Hollands said China has adopted the trappings of a market-based economy but in practice this is “phoney capitalism”. “Scratch beneath the thin veneer and China is an illiberal, Marxist state where the priorities of the Communist Party take precedence. The interests of international investors rank way down the pecking order.”

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Investors should not abandon the world’s second biggest economy altogether, which will provide opportunities for Western exporters, but Hollands cautioned: “Understand the risks.”

He said cracking down on the private economy risks leaving China permanently stuck as a middle-income nation.

The country’s workforce is already shrinking due to its one-child policy and India is now better placed to grow. “India’s fast growing population means it should overtake China as the world’s largest country. It is a democracy with an independent judiciary,” Hollands added.

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Dale Nicholls, portfolio manager at fund China Special Situations, said China has launched previous crackdowns, including one in 2018 designed to reduce the number of young people gaming.

Tencent fell 50 percent as a result but quickly recovered and Nicholls said recent falls could be a buying opportunity for brave investors.

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China has to create a stable investment environment to support growth and policymakers are seeking to calm markets, Nicholls said. “Government regulation is a constant in China and every investor must incorporate this in their risk/reward framework,” he said.

As a measure of US stock market power, the country’s companies still make up a massive 60 per cent of the global stock market. This compares to a meagure 4.1 per cent for Chinese firms.

Saxo Bank’s head of equity strategy Peter Garnry said the US remains the stock market to beat. “It will continue to dominate many high-growth technologies such as cloud computing, cyber security, digitalisation, semiconductors, machine learning and biotechnology.”

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The big worry is that US stocks now look relatively expensive after years of growth, and investors may have more exposure to US fortunes than they realise. A US stock market crash is possible too.

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