Chinese stocks have fallen sharply in recent weeks, with markets plunging to five-year lows on February 3rd despite promises from regulators to stabilize conditions. The benchmark Shanghai Composite entered bear market territory, having dropped over 20% from recent highs. Efforts so far by Chinese authorities to arrest the declines have failed to reassure investors worried about slowing economic growth.
Steep Losses Across Chinese Equities
The Shanghai Composite closed down 1.07% on February 3rd, ending the week 8.26% lower for its worst weekly performance since late 2018. The tech-heavy ChiNext index dominated by startups fell even further, ending the week down 12.2% (Economist). Other major indices like the Shenzhen Component similarly saw double-digit percentage declines over the five trading days.
In total, the combined market capitalization loss over two weeks neared $1 trillion, wiping out much of 2023’s gains (Finbold). The small-cap focused CSI 1000 index dropped 8% on February 3rd alone as margin calls forced the liquidation of shares (BNN Breaking). This compares to a 5% fall in large caps represented by the CSI 300.
|Feb 3, 2024
Foreign investors have rushed for the exits alongside locals, registering the largest monthly outflow from mainland markets since 2014. Almost $12 billion in overseas money exited Chinese equities over the past two weeks.
Plunge Despite Promises of Support
The sharp declines occurred despite Chinese authorities implementing fresh measures meant to stabilize conditions. On February 4th, the China Securities Regulatory Commission (CSRC) pledged to keep markets stable, protect small investors, and crack down on illegal activity (ABC News).
Specific steps taken include:
- Restricting securities lending to prevent short-selling
- Forbidding major shareholders and company execs from reducing stakes
- Curbing margin financing terms to reduce forced liquidations
However, the absence of more forceful stimulus or clear rescue plans has left investors skeptical of the government’s commitment. The Shanghai Composite initially rose nearly 2% on February 6th after the CSRC promised to prevent risks from share pledges before giving up gains to close down 0.5% (WSJ).
With conditions reminiscent of 2015’s market collapse, many believe Chinese authorities are less inclined to stage another full-scale intervention after being burned the last time (Telegraph).
Bleak Growth Outlook, Covid Issues
At the core of investor worries is China’s weakening economic outlook. Q4 2023 GDP increased just 2.9% annually, and December reports showed both industrial production and retail sales badly missed expectations. The services sector continues struggling with the Zero-Covid policy denting consumption and activity.
Growth is widely expected to keep decelerating in 2024 absent major stimulus. But sizable easing looks improbable now with surging Covid cases and China still targeting GDP gains below 5%. Investors are losing faith Xi Jinping can achieve his stated goals without compromising virus containment.
Market strategist Brendan Ahern notes China may be nearing an inflection point where policy credibility wears thin amid accumulated pressures:
“The quandary for officials in Beijing is propping up asset prices risks further imbalances and moral hazard down the line. But if markets are left unattended, things could spiral quickly especially with the economy already reeling.”
Already recent intervention by the “national team” of state-backed funds has propped up equities without stopping the bleeding. There are also concerns over hidden leverage in the system tied to pledged shares, where the CSRC just introduced fresh limits on transactions.
Global Repercussions Starting
So far China’s market chaos has not spilled substantially into other equity markets, with Wall Street proving relatively resilient after a volatile January. But there are signs international investors are growing wary of potential systemic risks.
Chinese developer Shimao’s failure to make a payment on a Singapore-denominated bond may be only the first sign of cracking confidence in the world’s second largest economy. Pessimism over China was a notable drag during the recent Federal Reserve policy meeting, playing into the central bank’s indicated pause on rate hikes.
If China’s markets continue deteriorating and currency/debt concerns mount, global sentiment may suffer material damage. This vulnerability recalls 2022 conditions early in Russia’s invasion of Ukraine.MIMMIM
For now Xi Jinping appears trapped balancing economic necessities against rigid virus rules nearly three years into the pandemic – a precarious position leaving investors bewildered. The path ahead looks treacherous for Chinese equities even if a full-scale crash is avoided.
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