Residential houses in Nanjing, east China's Jiangsu province, last month. Costfoto/NurPhoto via Getty Images
Chinese stocks have just endured another dismal week, with a benchmark of Hong Kong-listed mainland companies at the bottom of global stock index rankings for the year to date.
Grim milestones have piled up in recent days: Tokyo has overtaken Shanghai as Asia's largest stock market, while India's valuation premium to China has hit a record. Locally, a collapse in Chinese stocks is having a devastating impact on the country's asset management industry, driving mutual fund closures to their highest level in five years.
The Hang Seng China Enterprises Index has already lost 11% in 2024. After a record-breaking four-year losing streak, the slump reinforces a structural shift that is causing everyone from active money managers to passive funds to turn their backs on the world's second-largest stock market.
The Nasdaq Golden Dragon China Index slipped as much as 2.2% early in U.S. trading on Friday, extending losses to a fifth straight day.
In total, around $6.3 trillion has been wiped off the market value of Chinese and Hong Kong stocks since the 2021 peak, underscoring the challenge Beijing faces as it tries to halt the decline in investor confidence. Authorities have ruled out using massive stimulus to revive the flagging economy, leaving traders wondering when things will improve.
“What we're seeing so far this year is actually a continuation of what we saw last year,” John Lin, chief investment officer for China equities at AllianceBernstein, said in a Jan. 17 interview on Bloomberg Television. “These toothpaste-squeezing stimulus measures have so far failed to reverse the bottom-up fundamentals of areas like real estate.”
'waiting game'
The HSCEI indicator has plunged more than 6% this week and is on track to post its worst January performance in eight years. On the mainland, the CSI 300 index has fallen in nine of the last ten weeks. Signs that sovereign funds were likely buying exchange-traded funds and a decision by China's largest broker to suspend short selling for some clients failed to stop the onshore benchmark's losing streak.
The headwinds rocking the market are well-documented: China's real estate sector remains a trouble spot, deflationary pressures are building and a long-standing feud between Beijing and Washington shows no sign of abating as the U.S. election is scheduled to take place later this year. In recent days, uncertainties over the direction of US interest rates and the threat of an imminent collapse of local equity derivatives have increased investor concerns.
Asian fund managers have reduced their allocation to China by 12 percentage points to a net underweight of 20%, the lowest level in more than a year, according to Bank of America's latest survey.
Benchmark fund managers sold a net $300 million worth of stocks traded in mainland China and Hong Kong this month, according to an analysis by Morgan Stanley. That's a turnaround from the last half of 2023, when they bought a net $700 million even as stock indices fell.
“China is a waiting game and we continue to wait,” said Mark Matthews, head of Asia research at bank Julius Baer & Co., which largely avoids Chinese stocks.
Beijing's efforts to reassure investors have been met with skepticism from investors, many of whom fear authorities are lagging behind. While the People's Bank of China took steps to pump cash into the financial system last month, it defied widespread expectations to cut a key interest rate on Monday.
In a speech to world leaders at the World Economic Forum this week, Chinese Premier Li Qiang emphasized his country's ability to meet its growth target of about 5% for 2023 without flooding the economy with “massive stimulus.”
The loss of trust is currently so great that even attractive valuations are of little help. The MSCI China Index has never been cheaper compared to the S&P 500 in terms of expected earnings estimates. Nevertheless, bets on a short-term recovery have not come to fruition.
“The government seems very confident about the economy,” said Xin-Yao Ng, investment director for Asian equities at abrdn. “The market may not even trust the 5% growth number, it certainly has a much more negative view of the economy and definitely believes Beijing needs a comprehensive fiscal response.”
– With support from Sangmi Cha, April Ma, Hideyuki Sano, Carmen Reinicke and Cristin Flanagan