China's Shenzhen exchange falling 1.3 percent overnight highlights how easily the country's regulators can affect trading in the country's stocks. It's an issue for international investors, since MSCI, one of the world's biggest indexing firms, just agreed to begin including mainland China stocks in its global indexes, which are used in some of the biggest exchange-traded funds in the world.
First, bank regulators are reportedly conducting financial reviews of overseas asset buyers. It's common knowledge that big firms like Anbang (which bought the Waldorf Astoria last year), Dalian Wanda, Fosun and HNA have been on a global buying spree in the last couple of years. Regulators have reportedly asked banks for more information on overseas loans made to these companies. This comes just a week after reports surfaced that Anbang's chairman was under investigation, so naturally the Chinese rumor mill immediately assumed there was some kind of broader investigation into Chinese corporations that have been on a global buying spree.
Shares of Fosun International were down nearly 6 percent in Hong Kong, while Wanda Film Holding was down nearly 10 percent in Shenzhen.
In a separate development, a second Chinese regulator — the State Administration of Press, Publication, Radio, Film and Television — announced it was shutting down Weibo's video services because it did not have the proper licenses. Self-produced videos are enormously popular in China. The stock is down nearly 6 percent in trading on the NASDAQ. Sina, which still owns nearly half of Weibo, is also down nearly 4 percent. Other companies like YY and Momo were also down in sympathy.
What's going on? To Brendan Ahern, who runs the KraneShares MSCI China A Shares ETF (KBA), an ETF that is a basket of mainland China stocks, this is largely about President Xi Jinping's effort to ensure stability in the financial system.
"This comes in advance of a party congress at the end of the year that will name China's leaders for the next five years," Ahern told me. "There is going to be a big emphasis on keeping things stable."
In addition to scrutinizing the nation's tycoons, there is also an effort by regulators to get their hands around the largely unregulated video services industry, which has been used to express political opinions. According to Chinese business news platform Yicai Global, Chinese authorities have said that Weibo broadcasts "politically-related content inconsistent with state regulation" and promotes negative comments.
"It's been very difficult for authorities to monitor live video streaming," Ahern said. "I think they want some of this to be turned off until they figure out how to control it."
Will all these actions really promote stability? Ahern isn't sure, but admits, "The timing is a little disappointing, because you have a big moment in the sun for Chinese stocks," due to MSCI's announcement this week that they will begin including mainland China stocks in their global indexes beginning next year.
MSCI seemed well aware of the potential for political risk when it made its decision this week. They announced that mainland China stocks would be included on a gradual basis, and clearly stated that the pace of inclusion would very much depend on how Chinese regulators allow for more open markets.
Smart move on their part!