Chinese stocks have plunged to their lowest levels in five years this week, with the benchmark Shanghai Composite index falling over 6% amid growing pessimism over China’s economic prospects.
Stocks Sink Despite Government Efforts to Prop Up Markets
The sharp declines came despite aggressive interventions by Chinese authorities to shore up equities. According to the state news agency Xinhua, China’s central bank injected liquidity into the financial system, while the state asset regulator said it would launch a batch of major strategic mergers and restructurings to boost markets. However, analysts said these measures would likely fall short.
“Beijing’s national team – the state-owned funds tasked with buying stocks during times of volatility – is not riding to the rescue as enthusiastically as in the past,” said Chen Zhao, managing editor at Alpine Macro.
The Shanghai index is now down over 12% for the year and more than 30% from its 2021 peak. Other Asian markets also fell Friday but losses were more modest than in mainland China. Japan’s Nikkei 225 index slipped 0.4% while Hong Kong’s Hang Seng dropped 1.1%.
Foreign Investors Flee Chinese Markets
The turmoil has triggered a stampede of foreign investors out of Chinese stocks, with overseas traders offloading a record $14.2 billion of mainland shares so far this month, according to Bloomberg data.
“The pace of foreign divestment now exceeds even the height of the Sino-US trade war in 2018-2019,” noted equity analyst Wang Feng of Shanghai United Securities. “Clearly global asset managers have lost faith in Beijing’s ability to revive market confidence and momentum.”
Economic Headwinds Mount
The stock market chaos adds to a growing list of headwinds buffeting the $17 trillion Chinese economy.
China’s GDP growth is expected to drop to under 5% this year, which would be the slowest pace in over 25 years according to data from the National Bureau of Statistics. Sluggish domestic consumption, recurring Covid lockdowns and a battered property market have all clouded the outlook.
Meanwhile consumer inflation has surged to a 15-year high of 5.4%, squeezing Chinese household budgets. Factory activity also shrank sharply in January driven by a pullback in production as well as softer domestic demand.
| Key China Economic Indicators | 2022 | 2023 Forecast |
|---|---|---|
| GDP Growth | 3.0% | < 5% |
| Consumer Inflation | 2.8% | > 5% |
| Industrial Production | 3.6% | < 3% |
Policy Response Seen As Inadequate
While Beijing has taken some steps to prop up the economy, including cutting interest rates and pumping liquidity into the banking system, analysts said market confidence in authorities’ crisis management skills is falling.
“Unlike 2021 and 2022, investors now see mostly empty rhetoric rather than material policy action from Chinese decision makers,” said economist Li Xiu of Beijing University. “Fiscal stimulus plans lack details and there are no signs of a forceful easing cycle from the People’s Bank of China.”
Without more decisive intervention, some strategists warn China may stumble into a 1990s-style deflationary spiral, where sinking asset prices trigger knock-on distress in the wider economy.
“Policy blunders now would risk financial instability. Chinese authorities face their biggest test in a generation,” warned analyst Shen Ping of JPMorgan.
Gloom Spreads Across Chinese Stock Market
Beaten-down sectors like tech and real estate led this week’s declines. The Hang Seng Tech index plunged nearly 10% over the past five sessions dragged down by heavyweights like Alibaba and Tencent.
“China’s biggest tech names are struggling with shrinking sales, loss of market share overseas and several rounds of heavy-handed regulation from Beijing,” said Ben Lamb of BCA research. “This is not an environment where earnings multiples can expand.”
Property developers were also hammered as concerns over debt exposures caused a panic selloff. One gauge of real estate firms listed in Hong Kong plunged nearly 25% this week to lows not seen since the dark days of China’s 2015 market crash.
Calls For Decisive Action Mount
As conditions deteriorate, calls are growing for policymakers to take more forceful action. Peng Wensheng, chief economist at Everbright Securities, called for quicker implementation of infrastructure projects and easier credit for small businesses.
“Large-scale policy stimulus starting in the first half (of 2023) could stabilize economic growth by year’s end,” said Lu Ting, chief China economist at Nomura.
However, with Chinese assets sinking across the board, some analysts warn investors should brace for more near-term pain before any potential rebound materializes.
“Markets are looking over the edge of a precipice now, though stocks are very oversold on a technical basis” said analyst Wang Yang of Taihe Securities. “Ideally we see a fierce policy response before month’s end, otherwise confidence could collapse further.”
Uncertainty Reigns
With both the economic and market outlook shrouded in uncertainty, volatility is expected to remain high in coming weeks.
“Two way volatility will persist until we get clear signs of policy traction,” said economist Zhiwu Chen of Yale University. “But for long-term investors, Chinese stocks seem enormously oversold at just 9X trailing earnings against 16X historical averages.”
So while risks still abound, patient capital may find select opportunities amid the carnage as Beijing battles to put a floor under battered markets.
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