Are Chinese Stocks Uninvestable After New Leadership Changes?

With recent shifts in Chinese leadership and policy direction, some investors are left questioning the viability of investing in Chinese stocks. Does Beijing’s power consolidation mark the end of the road for foreign capital? Or could this plunge present a buying opportunity for contrarian investors?

The Market's Sudden Shift

At the open of global markets following Xi Jinping’s weekend announcements, Chinese equities suffered a dramatic rout. On U.S. exchanges, tech giants such as Alibaba and JD.com tumbled by as much as 13% in a single session. NIO slid 16%, Baidu fell over 12%, and Didi dropped around 12%. Meanwhile, the Invesco Golden Dragon China ETF—which tracks roughly 65 U.S.-listed Chinese companies—plunged 15% on Monday, bringing its loss from the February 2021 high to 78%. Onshore, the Shanghai Composite slumped about 2% and the Hang Seng Index fell over 2.5%. This broad-based sell‐off wiped out nearly $200 billion in market value in one trading day. While some traders attribute the drop to algorithmic stops and liquidity imbalances, analysts are pointing squarely at political uncertainty as the catalyst.

Leadership Changes and Their Implications

Between October 16th and 22nd, delegates at the 20th Communist Party Congress approved Xi’s unprecedented third consecutive term, effectively cementing his rule through at least 2028. This breach of the two‐term convention, codified in the 1982 constitution and only overturned in 2018, underscores Xi’s drive to centralize authority. The reconstitution of the Politburo Standing Committee—the party’s apex decision-making body—saw six loyalists elevated. Notably, Li Qiang, a close Xi ally who orchestrated Shanghai’s strict zero‐COVID lockdowns, became Premier without serving as Vice Premier first, defying past norms. Equally symbolic was the abrupt, filmed removal of former General Secretary Hu Jintao from the Great Hall, widely interpreted as a choreographed display of loyalty and power. For investors, these signals raise red flags about the regime’s willingness to prioritize political control over market flexibility.

The Economics of “Common Prosperity”

Xi’s reaffirmation of “common prosperity” as an economic objective has reignited concerns about profit redistribution and regulatory tightening. While this slogan dates back to Mao-era collectivism, post-Mao reforms relaxed the notion to permit wealth accumulation. Since 2021, however, policy actions—such as antitrust investigations into tech platforms, caps on private education fees, and proposals for a higher minimum inheritance tax—signal a shift back toward state intervention. Real‐estate developers faced curbs on debt and new property taxes are under study. In theory, common prosperity aims to curb inequality; in practice, it could translate to dividend limits, mandatory social levies on profitable firms, or direct state takeovers of strategic assets. That prospect has many shareholders wondering whether Beijing will channel a greater share of corporate earnings into social initiatives rather than let it flow to investors.

Charlie Munger’s Stance

Against this backdrop, Charlie Munger—a longtime partner of Warren Buffett—has doubled down on one of China’s marquee stocks. Through the Daily Journal Corporation, Munger invested nearly 30% of its U.S. equity portfolio in Alibaba. He initiated 165,000-share purchases in Q1 2021 at $220–$270 per share, followed by 137,000 shares in Q3 2021 at $150–$200. Late in 2021, he added another 300,000 shares before selling the initial tranche to realize a tax-loss for U.S. fiscal purposes. Despite Alibaba’s 65%–75% decline over his cost basis, Munger remains committed. His reasoning? “The companies we invest in are stronger relative to their competition and priced lower.” He asserts that the margin of safety provided by cheap valuations outweighs potential political headwinds.

"The companies we invest in are stronger relative to their competition and priced lower.” — Charlie Munger

Unpacking the Risks

Political risk in China encompasses several dimensions. First, U.S.–China trade tensions and national security concerns could spur delistings of Chinese ADRs or broaden export controls on semiconductors and advanced technology. Second, disputes over Taiwan raise the specter of sanctions or even conflict-related supply-chain disruptions. Third, data-security rules may force foreign investors to cede ownership in sectors deemed “strategic.” Fourth, ongoing human rights criticisms—such as those around Xinjiang—could invite sanctions that impact corporate partners. Additionally, the People’s Bank of China still enforces strict capital controls, limiting repatriation of profits. For global funds, these factors complicate portfolio allocations and heighten the potential for abrupt regulatory shifts.

The Bloodbath Continues

The market turmoil did not stop with Monday’s open. U.S.-listed Chinese stocks saw continued pressure throughout the week, with volume spikes and record net outflows from China-focused ETFs. On the mainland, the Shenzhen Composite plunged 3%, dragging small- and mid-cap stocks down sharply. The Hang Seng Tech Index lost over 4%, reflecting outsize losses in internet and electric-vehicle names. Bond yields also rose, as the yield on China’s 10-year government note inched toward 3.4%, its highest since mid-2022. Overseas, mutual funds closed the month with billions in redemptions. Analysts warn that if confidence falters further, the mainland could suffer the first net foreign capital withdrawal in several years.

Evaluating the Future

Where does this leave investors? Pessimists argue that China’s reversion to heavy-handed governance makes large-scale buying imprudent. They foresee a bear case in which prolonged regulatory crackdowns and policy shifts erode earnings visibility. Optimists counter that valuations have reached extreme lows—Alibaba trades near a 20% discount to its five-year average P/E—and that Beijing will ultimately support growth to maintain social stability. Key indicators to watch include revisions to the “common prosperity” implementation plan, guidelines on corporate dividends, and any fresh rulings on digital platform governance. Asset allocators may consider small, phased entries via low-cost, broad-market ETFs while maintaining tight position limits and hedges against currency devaluation.

Key Takeaway:
• Monitor upcoming regulatory directives from Beijing on profit-sharing and tech oversight to gauge the sustainability of corporate cash flows.

What is your view on investing in China given the evolving leadership landscape? Are you positioned for a rebound, or is the risk of state intervention too great?