What happened

Shares of Chinese tech and fintech companies Tencent Holdings (TCEHY -0.87%), Huya (HUYA -0.85%), and Lufax Holding (LU -1.81%) fell 14.5%, 4.6%, and 3.3%, respectively, as of 1:11 p.m. ET.

The across-the-board sell-off in Chinese stocks this morning wasn't hard to figure out. This past weekend, China concluded the Communist Party's 20th National Congress. During the proceedings, President Xi Jinping consolidated power, as he was selected for an unprecedented third term as president, breaking with recent tradition. Furthermore, Xi packed the new seven-person Chinese Politburo with loyalists, cementing his grip on power.

As Xi has instituted unpopular regulatory campaigns against the country's tech sector and implemented harsh lockdowns in a "zero-COVID" policy this year, his consolidation of power was enough to send foreign investors fleeing U.S. and Hong Kong-listed Chinese stocks. 

So what

Formerly China's largest company, Tencent has borne the brunt of Xi's crackdown on the country's technology sector, which began around late 2020. Since that time, the government has cracked down on youth video gaming and halted the approval of new games for extended periods, harming one of Tencent's main profitable businesses. As a gaming culture-focused short video platform, Huya was also affected by these regulations.

The government has also begun cracking down on new fintech leaders in the country that are challenging state-run banks, which could affect both Tencent's Ten Pay and Lufax, a consumer finance platform that makes various types of loans and sells wealth management products. In fact, the fintech area is where the whole technology crackdown started, when Alibaba Group Holding founder Jack Ma criticized the government's restrictive stance on financial innovation, while touting Alibaba's Ant Financial platform as an alternative. That didn't work out so well for Ma and Ant Financial, as the company was subsequently broken up and partially nationalized, while Ma has been silenced and out of public view since that time. 

It remains to be seen how the new government and Politburo will act, but apparently, capitalists don't like the outlook. With the technology crackdown and zero-COVID policies, Xi has displayed a philosophy favoring ideology over economic growth, especially over the past two years. Now without anyone to check his power or disagree, investors clearly don't want their capital in China. Add in the potential for an invasion of Taiwan, as well as new U.S. sanctions on advanced semiconductor sales to China, and investors seem to be selling Chinese stocks first and asking questions later.

Now what

Is this across-the-board selling on Chinese stocks, which have already been decimated over the past 18 months, ultimately a buying opportunity? It's difficult to say. No doubt, many Chinese stocks are dirt cheap right now, with Tencent down 70% from all-time highs and Huya and Lufax each down more 90% from their all-time highs.

However, with Xi's tightening grip on power, investors must also factor in the chance of war or increased limits on trading U.S.-listed Chinese stocks. Additionally, one has to wonder if the Chinese economy may be headed for outright recession amid its real estate downturn, zero-COVID policies, and ongoing issues in its tech sector.

With many high-quality U.S. stocks down so much amid this year's inflation-induced bear market, it doesn't seem worth the risk to gamble on China stocks at the moment. There are plenty of cheap alternatives in the U.S. and other developed countries. While they may not be as quite cheap as their Chinese counterparts, they don't have nearly the same risk of permanent capital loss.