Chinese stocks have experienced another dismal week, with a gauge of mainland firms listed in Hong Kong ranking at the bottom of global equity indices for the year. Most notably, Tokyo has surpassed Shanghai as Asia’s largest equity market, while India’s valuation premium over China has reached a record high. The ongoing meltdown in Chinese shares is causing significant disruption in the country’s asset management industry, resulting in mutual fund closures reaching a five-year peak.
The Hang Seng China Enterprises Index, representing mainland firms listed in Hong Kong, has already lost 11% in 2024, compounding the record four-year losing streak it experienced previously. This market slump underscores a structural shift, as both active money managers and passive funds turn away from China’s stock market, the world’s second-largest.
China’s and Hong Kong stocks have witnessed a staggering $6.3 trillion in market value wiped out
Since reaching its peak in 2021, Chinese and Hong Kong stocks have witnessed a staggering $6.3 trillion in market value wiped out. This substantial loss highlights the challenges Beijing faces in restoring investor confidence amidst a declining market. The government has ruled out employing massive stimulus measures to revive the economy, leaving traders wondering when conditions will improve.
John Lin, Chief Investment Officer of China Equities at AllianceBernstein, notes that the current market downturn is a continuation of the challenges faced in the previous year. The existing stimulus policies have not been successful in turning around the underlying fundamentals of sectors such as real estate.
The HSCEI gauge plunged over 6% this week, on track to record its worst January performance in eight years. On the mainland, the CSI 300 Index has experienced drops in nine of the last ten weeks. Despite signs of state funds purchasing exchange-traded funds and China’s largest brokerage suspending short selling for select clients, the onshore benchmark’s losing streak remains unbroken.
China’s stock market confronts several headwinds, including a troubled real estate sector, deflationary pressures, and the ongoing trade tensions with the United States. In recent days, concerns about the trajectory of US interest rates and the potential blowout of local stock derivatives have further intensified investor worries.
According to the latest Bank of America survey, Asian fund managers have reduced their allocation to China by 12 percentage points, resulting in a net 20% underweight position, the lowest in over a year. Furthermore, benchmark-tracking funds have sold a net $300 million worth of shares traded in mainland China and Hong Kong this month, reversing their buying trend from the latter half of 2023.
Efforts by Beijing to reassure investors have been met with skepticism. Many investors doubt that the measures implemented thus far adequately address the underlying issues. The decision not to cut a key policy rate, despite expectations, has further eroded confidence in the government’s ability to tackle the crisis effectively.
Despite attractive valuations, the loss of confidence in China’s stock market overshadows any potential benefits. The MSCI China Index now trades at its cheapest level compared to the S&P 500 gauge in terms of forward earnings estimates. Nevertheless, hopes for a short-term rebound have yet to materialize.
As the sell-off persists, the future of China’s stock market remains uncertain. Restoring confidence in the economy and enticing investors back will require Beijing to adopt more proactive measures to address the underlying challenges. Market participants closely monitor the situation, eagerly anticipating signs of improvement and stability in China’s stock market.