Xi Jinping Sinks Chinese Stocks

Somehow, an authoritarian surrounded by "yes" men doesn't inspire investor confidence.

Chinese President Xi Jinping (L) looks on as former President Hu Jintao is helped to leave early from the closing session of the 20th National Congress of the Communist Party of China, at the Great Hall of the People in Beijing, on Oct. 22, 2022. Kevin Frayer/Getty Images

The markets have shown China’s leader Xi Jinping that embracing authoritarian leadership and surrounding oneself with  obsequious “yes” men tends not to encourage investor confidence.

On Monday, the stock prices of some of China’s leading outward-looking companies like Alibaba and Tencent sunk by 11 percent in a single day. From Oct. 24 to Oct. 25, EST, the Hang Seng Index graph looked like an Olympic skiing slalom course, dropping an incredible 1,200 points, from about 16,200 to 15,000—nearly 7.4 percent—in just 19 hours.

We know who Xi Jinping is. He’s a totalitarian who sees himself as an emperor; we see him as a thug. His power move to have his personal bodyguard forcibly remove former party general secretary Hu Jintao from the 20th National Congress of the Chinese Communist Party (CCP) just before the vote to extend Xi’s term beyond the traditional two five-year terms has led some to speculate that Hu was set to protest the measure and Xi censored him proactively. Efforts by China to censor searches for Hu Jintao’s name in Internet searches would seem to indicate something political was amiss, not the “illness” cover story proffered by the CCP to curious foreign journalists.

Markets Don’t Like Totalitarian Regimes

They tend to avoid them or flee from them—and with good reason: such markets usually aren’t very prosperous because bad government policy decisions usually get no challenge. Moreover, even when a bad decision is recognized as such, totalitarians blithely cruise ahead with the bad policy so they don’t lose “face” in front of their people. That’s not to say such things don’t happen in liberal democracies, too. (Vietnam and Afghanistan, for instance; to say nothing of private-sector failures like “New Coke” and countless other product failures.) But, more often than not, liberal democracies tolerate opponents and dissent so that public policy errors can be readily identified and reversed, such as what occurred in Britain during the past couple of weeks.

The Investment Risk of Xi’s Ambitions

Perhaps the greatest threat to U.S. and other foreign investors in China, though, is Xi Jinping’s arrogant ambition. China has fought only relatively small wars with India over the years since it fought Americans in Korea more than 70 years ago. But Xi Jinping has been repeatedly belligerent and has made no secret of his assertion that Taiwan is part of China; history says differently. He seems set on realizing his ambition of taking control of Taiwan within his new five-year term. He should be wary: In the words of former heavyweight champion Mike Tyson, “Everybody has a plan until they get a punch in the mouth.”

History has shown the dangers of unconstrained ambition in totalitarian political leaders. When it is possible and appropriate, and their reach exceeds their grasp, as China’s does, they can be defeated, just as Hitler and Saddam Hussein were. Alternatively,  when appropriate to contain them, they are contained, as the Soviet Union’s leadership was and just as the Kim dynasty in North Korea has been. But the common thread among these totalitarian regimes is that their economies were destroyed.

Russia’s ambitions in Ukraine have devastated its economy, and it has not even engaged in direct combat with the United States or NATO. North Korea, “the Hermit Kingdom,” is a veritable prison of wretched, starving people closed off from the world. Even Cuba continues to suffer from the long-standing American boycott. Were Xi Jinping to attempt to realize his ambitions in Taiwan, even if the United States did not involve itself directly in combat, the sanctions that would be imposed by the United States, NATO, and “The Quad”—Australia, India, and Japan, with the USA—against China would devastate its economy.

For foreign investors, there should be a giant “STOP” sign hanging over any prospective investment in China. China’s macroeconomic risk from Xi Jinping’s leadership is too overwhelming to proceed.