The Bear Market That Never Ended

Chinese stocks peaked in early 2021. They've been falling ever since...

This is in stark contrast to almost every other major global stock market. U.S. stocks are back to hitting new all-time highs... and most European markets and Japan are doing the same.

Meanwhile, China is now entering its third year of a bear market. It was flirting with new lows earlier this year.

A lot of factors have contributed to the devastation of the Chinese stock market. But at its core, one seismic shift is responsible...

Global investors don't trust China. They think the Chinese government's capitalist tilt is gone for good.

As I shared yesterday, this isn't the first time investors have underestimated China. But this belief is wrong. Instead, big changes are happening in this country. And it means the bear market that never ended could soon take its final breath...

The perception that China is now "uninvestable" began in late 2020. That's when the Chinese government unleashed new, aggressive regulations on some of the country's largest, most powerful companies.

First, Beijing targeted one of China's most popular tech firms: Alibaba (BABA). It shut down the highly anticipated initial public offering ("IPO") of Alibaba's financial arm, Ant Group... Then, it went after other major tech businesses for anti-competitive practices.

For roughly a decade before then, Beijing had let large tech companies do what they wanted with impunity. These firms built incredible business moats with little oversight.

When China's laissez-faire policy ended, it became immediately clear that the government was back in control of the economy.

Investors hated the change. The adoption of a free-market philosophy is what had allowed China to thrive up to that point. The trustworthy, low-regulation environment had been great for business... And foreign investors had felt safe pouring money into Chinese stocks.

Once that business-friendly posture was dead, folks lost one of their biggest reasons to be optimistic about China's market. And Chinese stocks have crashed ever since.

The overall Chinese stock market is down nearly 60% over the past three years. And the technology sector is down around 75%. Take a look...

This has been a brutal multiyear bear market. And while Chinese tech rallied for a few months in late 2022, the slide resumed in early 2023.

The decline happened for good reason. The Chinese economy is slowing... Its real estate market is in trouble... And, most of all, the fear of regulation is still fresh in investors' minds.

But here's the thing...

The regulation crackdown is years old at this point. It's unlikely we'll see a new wave of anti-business surprises from Beijing... And when everyone already knows all the bad news, any news that isn't the end of the world will feel pretty darn good.

Beijing has recently made key moves to shore up its stock market against the bad press, too...

In February, China replaced the head of the China Securities Regulatory Commission ("CSRC"). (The organization is effectively China's version of the U.S. Securities and Exchange Commission.)

The last CSRC chairman took over in 2019, just before the regulatory crackdown began. His successor – Wu Qing – has a history of aggressive regulation as well. But it's telling that the former chairman was removed during a market plunge. Most view the switch as Beijing acknowledging that it has been too aggressive and is shifting toward a less antagonistic stance.

The second move from Beijing happened last summer. More than two years after the death of Ant Group's IPO, the government ended its campaign against the company by fining it 7.1 billion yuan. Industry experts see this as Beijing bringing its crackdown on tech to a close.

Regulators announced that "most of the prominent problems in the financial business of technology giants have been rectified."

In short, investor sentiment toward Chinese stocks is at "blood in the streets" levels... And the leaders in Beijing have had enough.

This is a crucial turning point. Things simply can't get much worse from here... which means they probably won't.

Now, we don't have an uptrend just yet. And that's something we'll want to see before buying.

But once prices reverse course, you'll want to be invested in this area of the market. So I suggest keeping a close eye on Chinese stocks today.

Good investing,

Brett Eversole

Further Reading

Gold prices recently hit a new all-time high. But investor sentiment remains in "no man's land." According to history, that won't last forever. Once sentiment reverses, even more gains are likely... Read more here.

Biotech firms can no longer raise cash without trying – but dedicated investors know these companies aren't finished innovating. And as biotech gets back on its feet, now might be a good time to consider gaining exposure to this sector... Learn more here.