Chinese stocks plunge the most since the 2008 crisis!

Chinese stocks plunge the most since the 2008 crisis!

Last updated: 28 Jul, 2021 | 09:20 am

Chinese stocks plunge the most since the 2008 crisis!

What’s leading to the crash?

China’s latest crackdowns on its technology and education sectors have led to a huge crash in its stocks. The Nasdaq Golden Dragon China Index -- which tracks 98 of China's biggest companies listed in the U.S. -- has plunged by more than 20% in the last one week itself.

This is the biggest weekly decline in the index since the 2008 financial crisis.

What is China’s latest regulation?

Last week, China's Ministry of Education set out a new set of rules which bars online training institutions from earning a profit, or raising funding on stock markets. The latest move is aimed at bringing in sweeping new policy reform in China. 

Rationale behind the move

According to the ministry,  the new rules will also lower the workload and learning hours of students and improve the quality of after-school services. The Chinese government is also looking to ease financial pressures on families. The financial burden of paying a very high cost for education has led to lower birth rates in the country. Last month, the Chinese government released measures aimed at encouraging births and lowering child-related expenses. 

International investors dump Chinese stocks

Most large international investors have sold off their holdings in Chinese-listed companies, due to fears that more sweeping regulations could hurt other industries in China as well. Here are actions by a few funds: 

  • Ark Innovation ETF cut its holdings of China stocks to less than 0.5% this month from a high of 8% in February. The fund completely exited its position in tech giant Baidu Inc. and has just 134 shares of Tencent Holdings Ltd. Its only other position, Chinese property site KE Holdings Inc., has dropped 60% so far this year, according to data from Reuters.
  • TAL Education Group, New Oriental Education & Technology Group Inc. and Gaotu Techedu Inc Some of China's largest education companies all fell at least 26% on Monday, adding to their record declines from Friday. These shares have fallen by 93% in the year so far.

International research houses caution of more sweeping reforms

  • China's new policy 'makes these stocks virtually un-investable,' said JPMorgan Chase & Co, in a recent note, adding that the 'worst case has now become a reality.”
  • While we see social merit in [the education news], we do think it has the potential to further dent foreign investors' confidence in China stocks,' wrote analysts at Nomura. 'Bruised and shaken investors are now likely to ponder which other areas could potentially become the next target of expanded state control,' it added. 
  • Goldman Sachs cautioned that investors should prepare for more such actions in other sectors. According to its estimates, one year price targets on the listed tutoring stocks would be cut by 78% on average. The impact, the note said, would be mostly due to the ban on weekend and winter and summer holiday tutoring, which brought in up to 80% of the firms' revenue.
  • 'The latest events arguably highlight that the authorities are more willing to upset investors in pursuit of their broader political goals now than they were a few years ago,'  Capital Economics noted. 'It is difficult to say precisely what will happen next on this front, but on balance it seems like the downside risks to equities have increased,' the research note added.
  • 'It is challenging for us to quantify the overall risks at this point, but it is clear that we are entering an uncharted territory with substantial moving parts,' Benchmark analyst Fawne Jiang told Reuters.
  • “We do not see a buy-the-dip opportunity. China’s recent regulatory crackdowns are the beginning, not the end, of increased control and command by Chinese leaders,” New Constructs, an investment research firm in Nashville said in a note.

Repercussions felt in other Industries as well

  • Although the pain has been felt the most by education and tech stocks, other sectors were also under pressure. Property management stocks traded in Hong Kong tumbled Monday after regulators said they were aiming to 'notably improve order' in the market.
  • Food-delivery giant Meituan saw its shares plunge by a record 14% as the Chinese government issued a notice that online food platforms must, among other things, respect the rights of delivery staff and ensure workers earn at least the local minimum income.
  • There are also concerns that the U.S. Securities and Exchange Commission may force delistings of Chinese companies that don't comply with laws requiring them to disclose financial information to regulators.