Holders of funds and trusts investing in China probably woke up on Monday wondering why their holdings had taken such a drubbing overnight.

The sharp fall in mainland and Hong Kong-listed stocks was all the more incongruous given third quarter GDP figures, which had been delayed by a week, were actually ahead of expectations at 3.9% instead of 3.2% as forecast.

The reason for the sell-off was market unease at president Xi Jinping’s blatant power grab during the Communist Party Congress which ended at the weekend.

As well as building the party around himself by filling the ruling committee with acolytes and allies, Xi sent a message to would-be opponents with the very public removal of his progressive predecessor Hu Jintao from the congress for ‘health reasons’.

Shares in Baillie Gifford China Growth Trust (BGCG) fell 6%, Fidelity China Special Situations (FCSS) fell 7% and JPMorgan China Growth & Income (JCGI) fell as much as 8.7% taking them all to multi-year lows.

The sell-off prompted a statement from Welkin China Private Equity Fund which said it had ‘paused’ its initial public offering due to
increased levels of macroeconomic uncertainty and market volatility.

With an unprecedented third term, Xi has tightened his grip on power meaning there is no chance his policies – ranging from increased state control, continuation of the Covid-zero strategy, tighter regulation of the property sector and hostility towards Taiwanese ‘separatists’ – are diluted.

On an economic level, Xi’s policies are not only hampering growth but are creating unemployment which has hit nearly 18% among 16-to-24-year olds.

On a political level, his determination to strengthen China’s military – of which he is commander in chief – and his assertion that the ‘wheels of history’ are rolling toward China’s ‘reunification’ with Taiwan has increased tensions at a time when global relations are already strained.

Just last week, America’s top diplomat Secretary of State Antony Blinken warned China was on a ‘much faster timeline’ than previously thought to attempt to take control of what it considers a rogue province.

A military operation to seize Taiwan would send world markets into panic mode as the island is a major global supplier of semiconductors and other essential IT hardware.

Earlier this month, the Biden administration ramped up its efforts to constrain China’s ambition to develop AI (artificial intelligence) projects by introducing new restrictions on exports of semiconductors and related technology including chipmaking equipment and software.

The move is one of the most aggressive blocks on US exports since the end of the Cold War, with technology magazine Wired saying the sanctions would effectively ‘kneecap’ China’s AI capabilities.

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