It’s a misnomer to call the Chinese stock exchange a market, because markets by definition are places where buyers and sellers freely meet and exchange things of monetary value. The People’s Republic of China, one of the two nations called China, (the other being the sovereign nation of Taiwan, off the mainland) is a centrally-planned economy. That means every aspect of the nation’s economic life is directed by the Communist party. Still, the nation’s leaders, in an effort to appear as free and open as other developed countries, operate a stock exchange in Shanghai and Shenzhen.
The main index that’s based on the top companies in the exchange is called the China A50 index, which is made up of the 50 largest companies on the two main exchanges. Only one generation ago, the country was a member of the emerging nations group. Today, even as a centrally-planned economy, it has grown to be one of the world’s economic giants and is watched closely by economists, politicians, and individual investors. As a long-term investment vehicle, the A50 is susceptible to the political whims of the nation’s one-party government and can be subject to non-economic factors. Even so, it’s instructive to take a peek at Communist China’s stock market, if only to figure out what the nation’s leaders are planning and to surmise the state of the Chinese economy.
The Chinese city of Wuhan, being the place of origin of the deadly COVID virus, was directly affected by the pandemic. Like most other economies, Chinese companies were hard hit in the early half of 2020, when the A50 decreased. Then, bouncing back faster than other indices, the A50 roared back to life from April 2020 until February 2021, when it backed off its long run-up and fell back from the above 20,000 point to just under the 18,000 mark, where it stands today. It’s difficult to tell whether the Chinese market will suffer another downturn or not, but based on how it performed since the pandemic hit, things look good for the major index and the economy as a whole. Consider that only about seven percent of the Chinese people own any stock at all, and it’s easy to understand why the nation’s stock exchange is not a good measure of how the nation’s economy is performing.
Unlike every other major world economy, China suffers from the ups and downs of economic sanctions. The EU, Canada, the U.S. and other free nations have recently imposed various economic sanctions on China, and the result has been a major sell-off of the country’s mutual funds, index funds, and individual stocks. The nation’s record as an abuser of basic human rights makes many individuals and institutions worry about the overall stability of the region. And they’re right to do so. In early 2021, as several nations were readying sanctions on China, the country seemed to double-down on its bad luck by tightening restrictions on local firms.
An example of the above noted restrictions is in the nation’s burgeoning electronic cigarette industry. As recently as last year, the e-cigarette companies were flying high, taking advantage of a global switchover from tobacco to less harmful alternatives. China was leading the world in the manufacture of these sleek new devices when, all of a sudden, the Communist party-led government decided to crack down on the successful industry with harsh new economic regulations. Now, predictably, profits are way down and the e-cig makers are just another group of companies that wonders when the next shoe will drop. The lesson is not lost on foreign investors, who see the government’s heavy-handedness as an unpredictable factor that can turn even the best of situations bad. Those e-cig corporations saw profits fall nearly 40 percent due to the new laws.
Watch the Terminology
One thing every investor should make note of is the terminology in financial media. You’ll often see writers refer to the Asian markets as doing quite well. Be careful not to assume that China is the sole or even the major playing in that grouping. For example, in the world of finance, Asia includes Australia, Taiwan (the other China), Japan, Korea, and the People’s Republic (the mainland, Communist nation). Note that every one of those economies, with one exception, is not centrally-planned. Some investors who like to buy into regional index funds and ETFs (exchange traded funds) that cover Asia are careful to opt out of Chinese stocks due to the volatility factor and the uncertainty of government actions. Unfortunately, non-democratic societies and stock markets don’t mix very well.