China’s plunging market becomes a high-risk bet on Xi

China’s lurch towards one-man rule has made it more important than ever for investors to align their portfolios with the priorities of President Xi Jinping. Some are deciding it’s not worth the trouble.

Chinese stocks tumbled by the most since 2008 in Hong Kong and the yuan hit a 14-year-low after the confirmation that Xi’s policies of stronger state control over the economy and markets will continue unchallenged for years.

Unlike in places like the US or UK — where dramatic market reactions can force policy pivots or even overthrow entire governments — it’s becoming apparent that investors are only an afterthought for Xi. That narrative was reinforced by Beijing’s move to delay the release of a raft of economic data without explanation, and risks further alienating money managers who are already leery of Chinese assets.

Investors have to decide if Xi’s policy objectives — such as common prosperity and dual circulation — are palatable, according to Hao Hong, chief economist at Grow Investment Group. “One has to examine whether these new sets of values align with your own” investment goals in the years ahead, he told Bloomberg TV on Monday.

Monday’s market reaction — especially offshore — may suggest that international funds do not consider themselves to be aligned with Xi’s policies, who has implemented tough curbs on investor favorite choices from Alibaba Group Holding Ltd. to education firms. With a new leadership team packed with his allies, analysts also expect little dissent against Xi’s Covid Zero strategy.

The Hang Seng China Enterprises Index slumped 7.3% — the most since 2008. The gauge trades at a paltry 6.5 times projected earnings, the cheapest since concerns about a hard landing in China spooked global markets in early 2016. The offshore yuan falls to the lowest since it started trading in 2010, while the currency dropped 0.5% in the mainland.

Even better-than-expected growth and industrial production data failed to lift sentiment. A rush to buy protection sent a VIX-like index up 24%. The most-traded option tracking the Hang Seng China gauge was a bearish put that profits if the index falls to 5,000 points — a level that provided a floor during the 2008 global financial crisis. It rises more than 1,000% in value.

“Clearly the market is concerned about the political narratives and imperatives over the data outputs,” said Brian Quartarolo, who trades Asia fixed income and currencies at hedge fund Lighthouse Investment Partners. “Foreign investors looked at the content in Xi’s recent speeches as showing insufficient concern for the pessimistic signal that offshore markets have been indicating.”

—Bloomberg