The beginning of 2024 has been challenging for the Chinese stock market. However, the truth is that the market has been consistently declining since its recent peak in February 2021. Over the span of three years, around 6 trillion USD in market capitalization has been erased from both the mainland Chinese and Hong Kong stock exchanges.
Since the beginning of the year, the Hang Seng Index has experienced a 10% decline, while the Shanghai Composite and Shenzhen Component indices have seen respective drops of 7% and 10%. This notable decrease in points evokes memories of the Chinese stock market crash in 2015-2016, indicating a diminishing investor confidence in China’s economic outlook.
“Over the past 3 years, it has certainly been a challenging period for Chinese stock market investors. The valuation of Chinese stocks is currently very low, and investment funds are allocating the lowest capital weighting in this market in about a decade”, as per a report from Goldman Sachs on January 23.
China’s economy is grappling with various issues, including a historic downturn in the real estate market, diminishing inflation, increasing debts of local governments, declining birth rates, and a contracting workforce. Some recent policy adjustments by Beijing have also presented challenges for the private economic sector and raised apprehensions among foreign investors.
The Chinese stock market stands out as the world’s most sharply declining market since the start of the year, contrasting with the global upward trend in stock markets, led by the U.S. and Japanese markets.
There are indications that the Chinese government is uneasy about the situation. Reuters reported this week, citing sources, that Beijing has directed state-owned commercial banks to sell USD to support the yuan’s exchange rate. On Tuesday, Bloomberg, citing insiders, reported that China is contemplating the establishment of a $278 billion fund to rejuvenate the stock market. During a meeting on Monday, Chinese Premier Li Keqiang urged relevant authorities to implement “strong and effective measures” to stabilize the market.
What prompts investors to sell Chinese stocks?
Investors are worried about China’s apparent lack of effective policies to sustainably rejuvenate its economy.
In 2023, China experienced a 5.2% economic growth, marking the lowest rate since 1990 when excluding the three years impacted by the Covid-19 pandemic up to 2022. Many international experts anticipate that the world’s second-largest economy will only achieve a 4.5% growth rate this year, further decelerating to below 4% in the medium term.
While such growth rates might be deemed reasonable for a sizable economy, they fall significantly short of the double-digit growth that China maintained for decades. Concerns are mounting among experts that China might be entering an extended period of sluggish growth, given the structural deceleration that its economy is undergoing, and this trend is not easily reversible.
“There is an increasing haze over Beijing’s policy stance towards the economy”, highlighted a report from Nomura Bank on January 22. “This week, the People’s Bank of China (PBOC) did not cut interest rates as expected. Statements from senior officials indicate that Beijing is not seeking short-term growth but is increasing long-term risks”.
In the previous week, the PBOC maintained the interest rate for the medium-term lending facility (MLF), contrary to market expectations of the first rate cut since August. This Monday, the PBOC once again kept the loan prime rate (LPR) unchanged, disappointing investors who were anticipating a rate reduction.
Demand drops, ineffective
Over the past year, China has taken incremental steps to boost economic recovery, but Goldman Sachs analysts argue that these measures fall short. A Goldman Sachs report suggests that a shift from gradual approaches to more substantial demand stimulation on a larger scale may be necessary to counter the prevailing pessimism in the market.
The report emphasizes the critical need for “effective government backing” to rejuvenate struggling real estate companies and stimulate homebuying demand, addressing the foundational issues causing economic challenges in the country.
Investor apprehensions also center around uncertainties regarding China’s economic trajectory. The Goldman Sachs report highlights doubts about China’s commitment to reforms, citing robust actions against major tech companies and an increased role of state-owned enterprises in pivotal industries. The report notes that such unpredictable policy shifts have dampened enthusiasm for investments.
Moreover, tensions in U.S.-China relations are seen as a factor prompting many U.S. investors to reduce their exposure to China and divest from Chinese stocks.
China’s actions to support the stock market
Prime Minister Li Keqiang, heading the State Council meeting on Monday, committed to taking measures to stimulate the stock market and enhance liquidity – as reported by Xinhua News Agency. However, the statement did not specify the precise actions to be taken.
Simultaneously, major state-owned banks in China intervened to support the yuan’s exchange rate, aiming to prevent a rapid depreciation of the domestic currency amid the stock market sell-off – according to Reuters, citing reliable sources.
Bloomberg reported on Tuesday that Chinese authorities are contemplating the creation of a 2 trillion yuan ($278 billion) fund, mainly financed by funds from offshore accounts of state-owned companies, to stabilize the stock market. The fund is anticipated to acquire listed stocks in mainland China through the trading link connecting mainland and Hong Kong stock markets. Additionally, the Chinese government has allocated 300 billion yuan from the budget to purchase stocks on the mainland.
“If these reports are accurate, the asset purchase program could create significant demand for the yuan”, observed strategist Ken Cheung from Mizuho Bank, suggesting that the PBOC’s decision to abstain from reducing interest rates at this juncture is aimed at sustaining the yuan’s exchange rate.
These developments proved effective in steering clear of a decline in the Chinese stock market on Tuesday. The Hang Seng Index concluded with a 2.6% gain, and the Shanghai Composite rose by 0.5%.
According to CNN
By. Pham Thanh Bien
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