Wall Street increasingly sees China as uninvestable 

“All our clients are asking us that question — given how cheap China appears, people inevitably say, well, has it discounted the worst news?”  

Sharmin Mossavar-Rahmani, the chief investment officer of the Goldman Sachs wealth management business, highlighted this month on Bloomberg Television a question that investors around the world have been asking recently. She then provided an answer: “Our view is that one should not invest in China.”  

At one time, Goldman, like the rest of Wall Street, was in love with Chinese stocks. Now, it’s not. The famed financial powerhouse at this moment is facing reality. Mossavar-Rahmani is correct because China’s companies are still a horrible bet and will remain so for a long time. 

Yes, Chinese equities have already lost $7 trillion in value since the peak in 2021, but the worst news from China has hardly been discounted. The country’s economy is crumbling fast, and Xi Jinping, the mighty leader, is determined to take China in the wrong direction.  

For decades, Wall Street fundamentally misunderstood China. The country looked modern with its technologically advanced stock markets. Investors were mesmerized.  

Yet the Chinese state, despite appearances, was not modern, and neither were its markets. Stocks had always moved more on government policy than companies’ performances themselves.  

That is true today as well, especially because the Communist Party under Xi has returned to openly dictatorial rule under the whim of one figure. As in Maoist times, the regime is relentlessly reasserting control over China.  

As a result, the Chinese markets have suffered. Consider this decade’s pivotal moment in international sentiment: the Ant Group’s initial public offering. The IPO, slated to be the largest in history, was set, with the overallotment option, to raise $39.5 billion in November 2020. Investors valued the six-year-old company at $359 billion, making it worth more than the world’s largest bank by assets, the state-backed Industrial and Commercial Bank of China. 

On Nov. 3 of that year, Shanghai’s Nasdaq-like STAR Market and the Hong Kong Stock Exchange announced the suspension of the offering about 36 hours before trading in Hong Kong. The unprecedented action shocked investors, both in China and abroad. 

What happened? Jack Ma, the driving force behind Ant, angered Chinese regulators in a speech in Shanghai the preceding month and, from most accounts, Xi Jinping himself decided to suspend the Ant offering.  

The Chinese regime, by this action, cast doubt on the soundness of China’s equity markets and, more broadly, on the long-term viability of the country’s private sector. As Chen Zhiwu of Hong Kong University told the Financial Times, “The message is that no big private businessman will be tolerated on the mainland.” Xi demands absolute obedience, something incompatible with a modern financial system. China’s communism and modernity do not mix. 

Two subsequent trends contributed to the new skepticism. For one thing, Xi’s broad-based attack on foreign business became evident with the forced closure of the Beijing office of U.S.-based Mintz Group last March. Authorities then raided other foreign consulting-research companies, such as Bain & Co. and Capvision.  

Furthermore, the regime amended its counterespionage law to cover more than just secrets. Now, the legislation protects anything related to “national security and interests,” which means everything. The Communist Party effectively criminalized everyday business information gathering, making investment in China even more risky.  

More fundamentally, the draconian COVID-19 lockdowns devastated the Chinese economy, which did not recover as fast as observers predicted. China’s official National Bureau of Statistics reported 5.2 percent growth for last year, but in reality, growth was far closer to the 1.5 percent estimated by the Rhodium Group. This year, soft consumer sentiment and persistent factory deflation suggest the economy could now be contracting. 

The failure of the Chinese leadership to articulate a practical recovery plan does not help investor sentiment. At the just-concluded annual National People’s Congress, the central government made clear, through its announced investment plans for the manufacturing sector, that it will try to export its way out of economic troubles. 

To the dismay of many observers, the government did not unveil a substantial plan to stimulate consumption, thought to be the only sustainable path forward. Moreover, officials announced they would abandon perhaps scores of failing property developers. The property sector, which accounts for roughly a fifth of gross domestic product, is collapsing. In the combined January-February period the sales of the 100 largest property companies in…