Beijing’s latest moves to crackdown on various sectors in the Chinese economy is spooking some investors, and one short seller believes that this is simply the start.

"I know the bulls wanted to say: 'It's just going to be the education stocks,' and then it was the crackdown on gaming," short seller Dan David told Yahoo Finance Live (video above).

In the last few months, the Chinese government under President Xi Jinping has started tightening regulations across various sectors such as gaming — both in terms of casinos and kids playing video games — in addition to Big Tech in the country and even celebrity culture.

“We really are not even in the beginning stages of the crackdown,” the Wolfpack Research Founder and CIO added. “China is going back to a policy of total control.”

Part of Xi’s focus is addressing the wealth inequality in China: There are 626 billionaires in China as of last year, as compared 724 to the U.S., according to Forbes. In contrast, Chinese Primer Li Keqiang said that there were 600 million people in China earning a monthly income of barely 1,000 yuan — roughly around $155 — during a 2020 press conference.

State messaging indicates that the Chinese Communist Party (CCP) is pursuing the concept of “common prosperity” to address the wealth gap.

"We will adhere to the mainstay status of the people and the direction of common prosperity, and always practice development for the people, development by the people, and sharing the fruits of development by the people," the CCP's most recent five-year plan stated. "We will protect the people's fundamental interests, inspire the enthusiasm, initiative, and creativity of all the people, promote the well-being of the people, and continuously realize people's aspirations for the good life (美好生活)."

From a foreign investor’s perspective, according to David, these developments made it “very dangerous” for U.S. investors to hold Chinese stocks. He also stressed that with big mutual funds like BlackRock, Vanguard, Fidelity still exposed to Chinese companies, that would put investors “at great risk.”

'They’ve missed out on what’s going on in China'

Some experts and investors still remain optimistic regarding the outlook for foreign companies in China — at least for the time being.

Cowen Research’s Oliver Chen told Yahoo Finance Live that he was “bullish on luxury goods” in the U.S. as well as China.

“Consumption has changed in China, where it’s more inside China, versus traveling,” said Chen. “The luxury market is very robust, as wealthy people have benefitted from stock market appreciation, real estate appreciation.” Chen added that he saw a lot of momentum for companies that are targeted to the middle-class, such as Coach and Tapestry.

Chen also acknowledged possible headwinds for foreign companies in China, especially for the brands catering to the ultra-rich. For instance, even though Louis Vuitton has an “outstanding presence” in China, Xi’s desire to achieve a “common prosperity” and the “egalitarian nature in China" could present a big risk to the luxury sector, said Chen.

Bridgewater co-chief investment officer Ray Dalio also argued for investing in China despite the crackdowns.

"I have found that most Western observers... interpret moves like these two recent ones as the Communist Party leaders showing their true anti-capitalist stripes even though the trend over the last 40 years has clearly been so strongly toward developing a market economy with capital markets, with entrepreneurs and capitalists becoming rich," Dalio wrote in a LinkedIn post on July 30, referring to the crackdown in the ride-hailing and education sectors.

"As a result, they’ve missed out on what’s going on in China and probably will continue to miss out," the billionaire hedge fund manager added. "I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away."

At the same time, no one outside of the CCP really know what comes next.

“While US regulators are primarily focused on just four Big Tech companies, the Chinese government is targeting dozens and has the centralized power to act quicker and more aggressively than the US,” DataTrek’s Jessica Rabe wrote in a recent note. “This nuance makes it trickier for investors to navigate the current environment, especially as Chinese regulators remain tightlipped about everything they have planned."

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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.

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