Since October 2007, Chinese stocks have been in a bear market, as investors have little incentive to return to the market anytime soon. Beijing’s leadership has created an environment that makes it harder for listed companies to behave like capitalist enterprises, enhancing shareholder value.
That’s a decline of close to 44 percent and 38 percent, respectively, and almost twice the 20 percent decline that Wall Street considers a typical bear market.
The 17-year-long bear market in Chinese stocks coincides with a period when the Chinese economic growth slowed, but remained in the upper single digits, before dropping to below 6 percent in the past five years.
Some large-capitalization stocks such as Baidu, PDD Holdings, and Alibaba trade with a forward price-to-earnings (P/E) ratio of around 10, which could make them deeply undervalued compared to their U.S. counterparts.
Yet investors do not seem to be in a rush to buy and hold Chinese stocks. Most market rallies over the 17-year bear market were trading rallies rather than a sustained recovery toward the old highs.
There are several reasons for the persistence of China’s bear market. One is poor corporate governance, which stems from government ownership of listed company shares through state-owned enterprises (SOEs) or investment entities. As a result, the government is the de facto partner of every listed company, limiting its managerial function of deciding how it will be run and how it will use its free cash flow, if any.
Another one is the inability of publicly listed companies to perform their entrepreneurial function and discover and exploit new business opportunities, the ultimate source of top-line growth—something equity analysts monitor closely to determine whether a listed company is a promising investment.
This problem stems from the government’s role as regulator, deciding which business publicly traded companies will be and for how long, as the killing of Alibaba’s Ant Group IPO demonstrates.
In the fall of 2020, Ant Group planned an initial public offering of $34.4 billion for the Shanghai and Hong Kong exchanges. But regulators killed it, arguing the company had “major” financial technology regulatory issues.
At least, that’s the official reason.
However, there’s also an unofficial reason: Ant Group’s exponential growth threatens China’s banking system, which is the province of the Chinese government.
But killing Ant Group’s IPO killed Alibaba’s growth, too, sending a clear and loud message to equity markets: Publicly listed companies do not exist to maximize shareholder values, as is the case in the United States and other free enterprise economies, but to satisfy the Chinese Communist Party’s agenda.
Markets didn’t like this message, sending Alibaba’s share price sharply lower after the Ant IPO’s cancellation, with no recovery in sight. On Nov. 15, its share price closed at $88.59, down from $310 in October 2020.
Still, another reason for the bear market is that the government induces excessive competition in sectors it deems critical to competing in world markets, such as the electric vehicle (EV) sector.
That isn’t good for Nio’s stockholders, as the stock has dropped from around $63 in 2021 to $4.70 as of midday on Nov. 21.
Juscelino F. Colares, associate dean for global legal studies, and Schott-van den Eynden, professor of business law, add another factor to the bear market: the bursting of the bubble in the property sector and developer defaults, which have shaken investor confidence.
“China’s stock market has been under significant pressure, primarily driven by a complex mix of economic, regulatory, and geopolitical factors,” Colares told The Epoch Times in an email.
“A key driver has been China’s struggling real estate sector, representing a significant portion of its economy. The default risks facing major property developers and the government’s measures to control debt in the sector have created ripple effects across other industries and shaken investor confidence.”
In addition, he sees the regulatory clampdowns on the technology and education sectors as aimed at asserting greater state control, contributing to market instability.
“These, combined with broader concerns about China’s slowing GDP growth and uncertainty surrounding U.S.–China relations, have intensified bearish sentiment,” he said.
Colares believes market valuations are now reaching attractive levels. Still, it’s unclear if the market has hit bottom.
“Much will depend on Beijing’s next policy moves and whether it takes more supportive steps to stabilize the economy,” he said. “If the government shows signs of easing restrictions or introduces stimulus measures, we could see a turning point. But for now, caution seems warranted as structural challenges persist.”
Michael Ashley Schulman, CFA, partner and chief investment officer at Running Point Capital Advisors, is concerned about the “big picture” of China’s investment environment. He is raising questions about the transparency of government-reported data and the ability to manage local government debt.
“Chinese stocks may offer value if government economic data can be believed, but that is a big if, as the equity market sugar-high from initial stimulus announcements may be wearing off and Chinese consumer spending remains tepid,” he told The Epoch Times. “Additionally, the government’s multi-trillion-yuan program to refinance local government debt must be generous enough to impress skeptics.”
