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The painful sell-off in Chinese stocks has deepened in recent days as international investors betting on a recovery lose faith that stimulus from Beijing is on the way.
The Hang Seng China Enterprises Index, a closely followed gauge of major Chinese listings in Hong Kong, has fallen about 11 percent so far this month after losing 14 percent last year. The benchmark CSI 300 index of domestically traded stocks fell more than 5 percent, taking into account the depreciation of the renminbi against the dollar.
January's downturn dashed expectations from Wall Street banks like JPMorgan and Goldman Sachs that China's stock market was poised for a recovery in 2024.
International investors “simply threw in the towel” after a speech by Prime Minister Li Qiang in Davos on Tuesday lacked any reference to new government measures to stimulate the economy or financial markets, the head of trading at a Hong Kong investment bank said.
He added that institutional investors cautiously bought some big Chinese tech stocks like Tencent and Alibaba in the first few days of the year, but “within three or four sessions they were already underwater, so they decided to dump those – and retail investors.” followed”.
Foreign investors, who had sold about 90 percent of the $33 billion worth of Chinese stocks purchased earlier this year by the end of 2023, continued their sales this year. Year-to-date outflows more than doubled on Wednesday after Beijing confirmed that China's annual growth was the slowest in decades and revealed that the country's population decline accelerated in 2023.
Nearly RMB 33 billion ($4.6 billion) of foreign money has already flowed out of China's stock market this year, according to Financial Times calculations based on data from Hong Kong trading program Stock Connect.
Barring a drastic turnaround, offshore investors will emerge as net sellers of Chinese stocks in late January for the first time since the program began in 2014 in the opening month of the year.
Li's surprise announcement – a day earlier than planned – that the economy grew an “estimated” 5.2 percent last year was seen by investors as a sign that leaders are confident in the Chinese economy despite ongoing difficulties, said Grace Tam, chief investment advisor of China Hong Kong at BNP Paribas Asset Management.
“The market took this as a sign that China is feeling very good [with the current growth rate] “Right now we’re not going to see a lot of economic stimulus,” Tam said.
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The risk of losses for foreign investors buying stocks in Shanghai and Shenzhen was exacerbated by weakness in the renminbi, which fell 1.3 percent against the dollar this month to RMB 7.1957.
Many Western investment banks had indicated that Chinese stocks would rebound this year. Goldman Sachs strategists have set a 12-month target of 3,900 for the CSI 300 index, which would require an increase of more than 19 percent from the index's current levels.
Meng Lei, equity strategist at UBS Securities China, said despite some investors' skepticism, now is still “a good time to be more positive on the A-share market.”
This was because nominal gross domestic product, which suffered from deflationary pressure last year, was expected to be more positive in 2024 as existing government stimulus measures come into force.
A long “unwind” of positions built by fund managers after market highs in 2021 will also come to an end this year, he said.