What happened

Chinese stocks fell hard this morning after China's President Xi Jinping secured an unprecedented third term, which will last for the next five years. For many decades now, Chinese presidents have been limited to two terms.

The news caught investors off guard and sent Hong Kong's benchmark Hang Seng index down 6.4% on Monday for the index's worst day since the Great Recession.

Shares of Chinese e-commerce giant Alibaba (BABA -3.08%) traded roughly 18.5% lower at 10:23 a.m. ET today. Shares of another large Chinese e-commerce company, JD.Com (JD -2.14%), traded 20% lower, and shares of Chinese online tutoring company TAL Education Group (TAL -2.68%) were down roughly 25%.

So what

The surprising news of Jinping's third term came at the conclusion of the 20th Chinese Communist Party Congress, a big political event held once every five years at which the party maps out future policy initiatives. Jinping will now hold the office of president in China for the longest time since Mao Zedong.

Red line with arrow moving downward.

Image source: Getty Images.

It's already been a tough year in China, where Jinping has faced plenty of criticism over his "zero-COVID" policies, which have resulted in broad lockdowns for months and have taken a big bite out of gross domestic product (GDP) growth this year.

Coming into 2022, the Chinese government had projected 5.5% GDP growth, but most analysts expect the country -- and the world's second-largest economy -- to fall well short of that forecast.

"While Chinese politics have long been opaque, this sharp consolidation of power is adding to investor unease. Equity valuations, already near a 10-year trough, will likely face more pressure if international investors demand a higher risk premium," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a recent research note.

Not only did Jinping not indicate any plans to soften his "zero-COVID" policies, but his administration has also not always been easy on Chinese tech stocks trading in the U.S. In 2021, regulators hit Alibaba with a record fine equivalent to $2.75 billion in an antitrust case that said the large company had abused its power. The fine came not long after Alibaba's CEO Jack Ma criticized regulators. Regulators in the past have also taken aim at online tutoring companies like TAL Education Group.

Still, the Chinese government has been more supportive of tech companies this year. The government has provided fiscal stimulus and worked with U.S. financial regulators to end a long-standing audit dispute that threatened to result in hundreds of Chinese stocks being delisted from U.S. stock exchanges.

Now what

Chinese tech companies have all sorts of potential, considering they are newer disruptors among a massive population that is also the fastest-growing consumer market in the world.

But a consistent issue has been how much the Chinese government and regulators can quickly and surprisingly hurt stock prices with regulatory news or geopolitical events. Tensions with the U.S. also seem to be ramping up of late.

Investors typically don't like countries that are less democratic because they are less likely to believe that these countries truly have free markets. While China's economy is undeniably a massive opportunity, moves like this don't support the idea of free markets.

While I still believe companies Like Alibaba and JD.Com have strong potential, especially after big sell-offs this year, before investing, you really need to understand the geopolitical landscape and how it can affect Chinese stocks. Like it or not, that kind of awareness needs to be part of your investing thesis in this sector.