Inflation in the United States has recently been stronger than experts had predicted. Faced with the likelihood of an interest rate rise, US stock markets have entered a bear market, and investors and companies are worried about a recession. Across the Pacific, Chinese authorities have been closely following US markets and are looking to capitalize on the current selloff.
They are interested in attracting the Wall Street funds leaving the U.S. equity market to China to boost its struggling economy. What is Beijing’s plan?
In a strange way, April 27 was a magic day for the Chinese stock markets. It was during the darkest days of the COVID lockdowns in Shanghai. Yet on that day, both the Shanghai Stock Index and the Shenzhen Stock Index stopped a four-month losing streak and started a rally. Almost concurrently, the U.S. stock markets started a downward trend.
The capital markets in the world’s two largest economies seem to be going in the opposite direction. In the current geopolitical tension, we can’t help but wonder if it’s coincidental or manipulated.
Is China creating a bullish market to attract Wall Street investors who have the cash from exiting the U.S. equity market?
Let’s first take a look at what happened on the Chinese side. During the four-month period from December of last year to April 27, the Chinese stock market performed abysmally. The Shanghai Stock Exchange Index shed 20% and the Shenzhen Stock Exchange Index lost one-third of its value. April 27 was the day that they turned around.
On that day, China’s A-shares rallied, with the Shanghai Stock Index rising 2.5% and the Shenzhen Stock Index rising 4.4%. And they have been on an upward trend ever since.
So what happened around April 27?
Let’s check the headline news of April 25 and 26. On April 25, Beijing officials said the Chinese capital confirmed 22 new COVID cases, the most yet in a single day this year, while Shanghai had a three-fold increase of COVID deaths from the previous day. The next day, on the 26, the authorities announced that twelve of Beijing’s sixteen districts would be subject to mandatory screening, and residents in the capital city rushed to stock up on food and other daily necessities.
Internationally, Russia hit Ukraine’s rail and fuel facilities, and the world feared Beijing’s escalating COVID outbreak would further disrupt global supply chains. On April 27, Sina Finance quoted a UBS Securities China analyst (Meng Lei) as saying that the return of overseas funds to China’s capital market would take some time as foreign investors are concerned with three factors:
One, international geopolitical tension; two, the delisting risks of Chinese stocks overseas; and three, China’s pandemic and COVID policy.
So amid geopolitical tensions and dilapidating lockdowns, there weren’t any events that triggered the sudden confidence of domestic or international investors in the Chinese stock market. What triggered the bullish Chinese run might be related to the U.S. market during the previous week. From April 20th to 22nd, the U.S. stock markets experienced three consecutive falls and the trend continued into the following week.
On April 25, media reported that the S&P 500 was off 7.8% for the month to date, the Nasdaq was down 12.2%, and the Dow declined 4.2%. The CCP had been watching this closely and saw an opportunity. With the U.S. inflation high and the prospect of more interest rate hikes, the Chinese anticipated a U.S. bear market. They wanted to attract the funds leaving the U.S. stock markets to China.
In order to do that, Chinese authorities had to create an artificially bullish market. You may say, that’s purely speculation. Yes, it is my speculation, but I have my reasons. First, the timing is too perfect. The turning point of the Chinese market took place right after a week-long fall in the U.S. market. And while the U.S. market steadily went down, the Chinese market consistently went up.
It’s almost said that Chinese investors collectively and consistently grew more confident in their capital market as the U.S. market slid into bearish territory. It is hard to believe such investor behavior given China’s current economic situation––unless, of course, the collective Chinese investor is the Chinese government.
My second reason for believing this is mainland Chinese media. Whenever the CCP wants to manipulate something, it must rely on its propaganda to create publicity. A few days ago, China’s major financial media suddenly started buzzing with headlines such as “The bull market is back!” and “Foreign capital is rushing to China!” At the same time, the stock price of Chinese automaker BYD hit a new high, with its market value surpassing one trillion yuan RMB.
Mainland Chinese media went wild: “The B(BYD) King is born! With market capitalization exceeding one trillion, surpassing Volkswagen, and closely behind Tesla.” But this good news seemed a little out of place with Chinese premier Li Keqiang’s grave warning about the Chinese economy during his recent 100,000-person conference.
Anyone with a discerning eye can see that the good news was to make noise for a bullish market that the regime was trying to create. Unlike the U.S. stock markets, which are dominated by institutional investors, 85% of the trading volume in China’s stock markets come from retail investors or individual investors. In order to pry retail investors’ wallets, the regime must tell a good story.
Using the publicity to manipulate people is what the CCP does best. So, we see Chinese media telling the story of a mysterious billionaire who invested in BYD before Warren Buffett did and now has become the richest man in Guangzhou, being worth twice as much as the founder of Evergrande.
Who is this mysterious man?
He is Lu Xiangyang, the brother-in-law of BYD’s founder Wang Chuanfu. According to the report, Lv is the third largest shareholder of BYD. He invested 2.5 million yuan in BYD when it just started out in the 1990s. By the end of last year, Lv had earned hundreds of billions by holding BYD shares. Such a heartwarming story about stock market riches ignited the Chinese people’s get-rich-quick zealotry.
It’s the publicity tool used by the CCP to manipulate the massive number of Chinese retail investors. China’s state-owned institutional investors may have also been behind it to push the market. Politically, the Chinese leader needs good publicity before the 20th National Congress this fall. Economically, the regime has a desperate need to attract foreign funds to boost the economy.
Will Wall Street investors be attracted to the artificially bullish Chinese market?
They may be cautious. Yet they may be more open to investing in the Hong Kong market. And this is actually what the regime wants. The Beijing authorities worry that Hong Kong is losing its appeal as an international financial center.
So far this year, Hong Kong’s capital market has performed poorly. Only 16 companies were listed through IPO on the Hong Kong Stock Exchange in the first quarter—that’s half as many as in the same period last year.
Last week, PriceWaterHouse in Hong Kong said at a press conference that the total capital raised for the newly listed companies in the first half of the year was only $2.3 billion US dollars, down 92% when compared to last year. That means the amount of capital raised is less than 10% of the same period last year.
In order to rescue Hong Kong’s capital market, Beijing must ease its regulatory supervision of Chinese big techs. And it did in May. After the authorities announced ending the probe into Didi Rideshare, on June 7, investors poured 270 million dollars into Blackrock’s iShares MSCI China ETF, setting a new record for the highest daily fund inflows since its inception in 2011.
iShares ETF is the largest overseas China equity ETF. Events like this are hardly news in the West, but they made the headline in China. The title of a China Securities Journal article best summarizes the CCP’s psychology: “Explosive! U.S. stocks plunged more than 600 points…Foreign investors went wild buying Chinese assets. The largest overseas China ETF set a record! What a signal!
I think the regime will want to maneuver things to let the Chinese stock market rise till the CCP’s 20th National Congress in the fall. But Xi Jinping’s enemy, the Jiang faction, has a big influence in the financial sector and may do the opposite to counteract. So it’s hard to say what will happen given the factional war that’s going on. We’ll have to wait and see