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February 24, 2024

Chinese Stocks Plunge to 5-Year Lows Amid Economic Gloom and Investor Exodus

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Jan 19, 2024

Chinese stocks have plunged to their lowest levels in 5 years this week, as a perfect storm of weak economic data, limited policy stimulus, and fleeing foreign investors batter market confidence. The benchmark Shanghai Composite index fell below the key 3,000 point level, clocking 4-year lows not seen since the early days of the pandemic.

Deteriorating Economic Outlook Weighs Heavily

The proximate trigger has been a slew of disappointing December economic indicators released this week, which showed activity contracting across industrial production, retail sales and fixed asset investment. This has reinforced fears that China’s strict zero-COVID policies and ongoing property market woes will continue dragging on growth through the first half of 2024.

With policy support also seen as lacking, optimism is in short supply. Global funds made net equity sales of $34 billion in 2022, cutting their average China allocation to record lows of just 31% by year end. The pace of selling accelerated in early 2024, with foreigners dumping a net $11 billion in shares over the first two weeks.

Stocks Plunge Despite Signs of State Support

The mounting gloom has sent the Shanghai Composite into freefall, now Nursing year-to-date losses of over 5%. However, the index did mount a sudden 1.4% rebound on Wednesday afternoon, which analysts attributed to state-backed funds intervening through large purchases of equity ETFs.

China’s “national team” of state-owned investment funds has a track record of stepping in to stabilize markets during routs. There were also unconfirmed reports this week that authorities had instructed major brokerages and institutions not to sell shares.

Nonetheless, the scope of the declines may mean Beijing cannot single-handedly turn sentiment. “It’s too early to tell when the China market will bottom,” said Saxo Bank strategist Adam Reynolds. “We need to see evidence of much more significant policy easing before investors return.”

Bracing For More Downside Before Recovery

Most analysts do expect some further downside over the coming weeks and months before a recovery materializes.

“Chinese equities face substantial near-term risks, with the chances of a single-digit Shanghai Composite index quite high,” warned Bank of America.

Ongoing foreign investor exits, the approach of the long Lunar New Year holiday when liquidity drops, and the potential for more COVID disruptions in winter all pose downside threats in the near term.

However, bargain hunters are starting to nibble in anticipation of longer-term upside. Chinese stocks now trade at just 9 times forward earnings – far cheaper than other emerging markets.

With valuations depressed, optimism is growing that authorities will unveil more significant stimulus and easing measures at the National People’s Congress parliamentary meetings in March.

Policies to Watch Out For

“All eyes are on the meetings for signs of a growth bottom,” said Credit Suisse economist Ning Zhang. “We see potential for a tactical rebound if large scale infrastructure spending is greenlit and lockdowns definitively ease from April onwards.”

Table 1: Key stimulus policies to watch for

Policy Probability Market Impact
Cut to bank reserve requirement ratios High Modestly positive
Relaxation of zero-COVID mandates Medium Very positive
Infrastructure fiscal stimulus package Medium Very positive
Benchmark lending rate cuts Low Significantly positive

However, some China skeptics caution that even with stimulus, intractable structural drags around demographics, debt, and US-China tensions mean the days of easy returns from Chinese assets may be over.

“Stimulus measures can boost short-term sentiment, but won’t resolve the deeper doubts global investors have,” noted TS Lombard strategist Larry Hu.

Nonetheless, positioning in Chinese stocks remains very light, opening the door for a violent rally if positive catalysts emerge. “Given the global funds washout, the slightest bit of blue sky could prompt a surge back into Chinese equities,” said Bank of Singapore chief economist Mansoor Mohi-uddin. For intrepid investors, greatly out-of-favor China may hold some of the best bargains and upside potential this year.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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