For investors in Chinese stocks, today is a very painful day. Indeed, shares of nearly every U.S.-listed Chinese stock is red today. With sentiment already extremely bleak for Chinese equity markets, these stocks got another big push today from the Chinese Communist Party.
Looking at the iShares MSCI China ETF (NASDAQ:MCHI), the broad index of Chinese stocks is down nearly 4% at the time of writing. That’s an absolutely massive single-day move, indicating an exodus of domestic and foreign investors from the Chinese stock market.
This significant sentiment shift has accelerated in recent days. However, investors will note that downward pressure in Chinese stocks has been materializing for months.
From the cancellations of initial public offerings (IPOs) to massive fines handed down via an anti-monopoly crackdown, the Chinese government has shown its eagerness to clamp down on big companies. The reasons for these clampdowns are uncertain. Some suggest these moves are intended to preserve power. Others believe that private sector CEOs have now grown to a size that has become threatening to the Chinese government. Whatever the case, investors don’t seem to want to stick around to see what the government will hand down next.
Today, investors are pricing in yet another headwind into Chinese stocks. Let’s take a look at what was announced that has led to such a steep drop today.
Education Crackdown Hurting Chinese Stocks
Today, the Chinese government announced its latest crackdown. This time, the CCP is focusing on the education sector.
Various education stocks including TAL Education (NYSE:TAL), Gaotu Techedu (NYSE:GOTU) and New Oriental Education & Tech (NYSE:EDU) have all lost more than 50% of their value today. Indeed, given such a steep decline, investors can be assured something is awry.
The government’s clampdown on education stocks comes as China looks to boost its long-term economic growth through encouraging its citizens to have more children. One key obstacle many have identified to having children is the increasing cost of tutoring and education services from for-profit businesses.
President Xi’s plans to turn the country’s for-profit companies into non-profits is just one of the reasons for today’s decline. A report showed the CCP also announced plans to restrict foreign investment in U.S.-listed Chinese stocks. This move would put in peril the VIE (variable interest entity) structure of many ADRs (American depositary receipts) for U.S.-listed Chinese stocks.
Indeed, the ability for Chinese companies to raise capital abroad is something that has fueled the growth we’ve seen in China. Accordingly, questions remain as to how targeted these initiatives will be. Additionally, these reports are just rumors at the moment — nothing official has been announced as of yet.
That said, Chinese stocks remain risky bets today. On the one hand, these are companies generally displaying incredible growth. Fundamentals are solid. However, the level of risk has become elevated for these stocks as of now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
