Investors in US-listed China stocks have a reason to be concerned. For the past few days, the share prices of these stocks have been plummeting at an alarming rate. So, why are China stocks falling, and what can investors learn from it to protect themselves in the future? Here is everything you need to know.
What is happening to China stocks?
In the span of three trading days, the Nasdaq Golden Dragon China Index, which tracks the performance of the 98 biggest US-listed Chinese stocks, has fallen by almost 19%. This is its biggest-ever drop.
According to Bloomberg, the stocks in the index have seen £829 billion (£595 billion) in value erased after hitting a record high in February.
Why are China stocks plunging?
The fall in China stocks follows a series of crackdowns by the Chinese government on its technology and education industries. The BBC reports that China has recently unveiled a massive overhaul of its $120 billion (£87 billion) private tutoring sector.
Under the new rules, all institutions offering tuition on the school curriculum will have to register as non-profit organisations. As a result, the institutions can no longer accept overseas investments or go public for financing.
This news seems to have spooked investors. Stocks in China’s private education firms listed in the US, Hong Kong and mainland China have plunged as a result.
Companies such as TAL Education Group and New Oriental Education & Technology Group, which are both listed in the US, have seen a significant amount of their stock market value wiped out in just a few days.
The Chinese authorities have also been reining in a wide range of online services. For example, earlier this week, the government issued new guidelines aimed at improving the treatment of food delivery drivers.
The country’s State Administration for Market Regulation (SMAR) has demanded that delivery workers be paid at least the minimum wage, that their workload be reduced and that they receive better training. Shares in Meituan, which runs one of China’s biggest food delivery apps, fell by 14% as a result.
Meanwhile, shares in another Chinese tech giant, Tencent, plummeted by 9% after the government ordered the company to give up some exclusive music licensing rights.
Not surprisingly, investors are increasingly concerned that these regulations in the tech and education sectors will be extended to other industries. This is causing many to have a relatively negative outlook on China stocks in the short term.
What’s the lesson for investors?
The biggest lesson for investors from the current situation is the importance of diversification. Diversification means having a wide range of different investments in your portfolio.
You can diversify by investing in different companies, industries and countries, and in different asset classes like shares, ETFs and mutual funds. Using this strategy, you reduce the overall risk of your portfolio underperforming or losing money.
When you diversify geographically, it means that political or regulatory issues in a single country will have less effect on your portfolio as a whole.
That said, diversification won’t protect you if you make poor investment choices. So, before you invest, always do your research.
If you are completely new to investing, then you should check out our investing guide for beginners. And if you are already well-versed, see whether you can get more out of your investments by using a stocks and shares ISA, which will protect your investment growth and income from tax.
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