Shares in Chinese technology companies tumbled in New York overnight as US investors were spooked after President Xi Jinping strengthened his political position further in the People’s Republic.
The Communist Party of China wrapped up its week-long national congress over the weekend, with Xi packing his central committee with loyalists, which is seen as potentially paving the way for an ongoing clampdown on the power of the country’s tech giants.
Alibaba Group (NYSE:BABA) fell 12.5% in New York to extend its 12-month decline to 64%, while Tencent Holdings (HK:0700) plunged 14.2% on the OTC markets and is now down 60.5% over a year.
Other major Chinese tech names were hit even harder, with online shopping platform Pinduoduo Inc (NASDAQ:PDD) crashing 24.6% - down 56% over a year - while food delivery group Meituan shed 16.7% - down 58% over a year - and electric carmaker NIO Inc (NYSE:NIO) dropped 15.7%.
Xi's move to remove the last vestiges of rival factions from the upper echelons of the party and stacking the Politburo full of his own people was “a clean sweep not seen since the Mao era”, said Julian Evans-Pritchard, senior China economist at Capital Economics.
“With political ties taking increasing precedence over technocratic experience, the quality of policy implementation could decline. And the dismantling of remaining checks and balances will make it harder for the Party to shift course if Xi Jinping’s policy agenda falters," he noted.
Since 2020, one of Xi’s policies has been to reduce the monopolies of technology industry leaders.
This has had repercussions for investors in London, where Scottish Mortgage Investment Trust PLC (LON:SMT), the most popular investment company for retail investors, has had a number of large positions in Chinese tech titans in its portfolio, along with several other Asia-focused investment trusts.
At the end of September, SMT had 2.8% of its portfolio assets in Tencent (reduced from 3.7% in August), while Meituan represented 3.4% and NIO was at 2.2%, while it had 1% in Alibaba - down from 1.6% in August - and a 1.8% portfolio holding in Pinduoduo.
In the trust’s final results, the SMT managers said in retrospect it had “been a mistake to reduce our holdings in western online platform companies rather than their Chinese counterparts,” following Beijing’s regulatory crackdowns.
SMT shares were, however, up 1.9% to 748.4p in early trading on Tuesday morning in London, and have risen by 2.3% since the start of the Chinese congress last week.
Other changes in Beijing include Liu He, who has been in charge of the Central Financial and Economic Affairs Commission, losing his seat on the central committee.
He is expected to be replaced by He Lifeng, head of China’s state planner, noted Capital Economics' Evans-Pritchard, whose track-record "suggests he is likely to favour a more statist approach to economic management".
Harvard-educated People's Bank of China deputy governor, Yin Yong, was elevated to the central committee and sources close to the central bank told Reuters that he is the front-runner to succeed incumbent governor Yi Gang.
Also stepping down from the committee were the finance minister, Liu Kun, and the head of the banking and insurance regulator, Guo Shuqing, committee. It is not clear who will take their places and we may not find out until March, Evans-Pritchard said.
He added: "Given how the leadership reshuffle has played out so far, the risk is that more loyal but less competent individuals could be chosen. If Xi sticks to proven technocrats for these key roles, that would be reassuring for the quality of day-to-day policymaking. But it would have a little bearing on the overall direction of policy, which is now firmly under Xi’s control."
In short, Evans-Pritchard said, China's economic policy appears to be shifting "away from market-based reforms in favour of a state-led campaign to increase self-sufficiency and economic security, along with a push to redistribute income and wealth.
"Our view is that it risks undermining productivity growth, rather than boosting it as hoped. If so, the leadership will need to correct course at some point if they want to get China’s rapid catch-up growth back on track. But political environment that Xi has created will make such a shift difficult," he concluded.