China: $6.3 trillion removed from the market value of stocks

(Bloomberg) — Chinese stocks just wrapped up another dismal week, with a measure of mainland companies listed in Hong Kong at the bottom of global stock index rankings for the year so far.

Gloomy milestones have been piling up in recent days: Tokyo has overtaken Shanghai as Asia’s largest stock market, while India’s valuation premium over China has hit a record. Domestically, the collapse in Chinese stocks has wreaked havoc on the country’s asset management industry, pushing mutual fund closures to their highest level in five years.

The Hang Seng China Enterprises Index has already lost 11% in 2024. This slump comes after a record four-year losing streak, and reinforces a structural shift that has everyone from active money managers to passive funds turning their backs on the world’s second-largest fund. Stock market.

China’s Nasdaq Golden Dragon index fell as much as 2.2% in early US trading on Friday, extending its losses to a fifth straight day.

In all, about $6.3 trillion has been wiped off the market value of Chinese and Hong Kong stocks since their peak in 2021, highlighting the challenge Beijing faces as it seeks to stem a decline in investor confidence. The authorities have ruled out using massive stimulus to revive the deteriorating economy, leaving traders wondering when things will improve.

“What we’re seeing this year so far is really a continuation of what we saw last year,” John Lin, chief investment officer for China equities at AllianceBernstein, said in a January 17 interview on Bloomberg TV. “The type of stimulus policies have so far not been able to change the fundamental fundamentals from the bottom up in areas like real estate.”

‘Waiting game’

The HSCEI fell more than 6% this week and is on track to record its worst January performance in eight years. On the mainland, the CSI 300 has fallen in nine of the past 10 weeks. Signs that state funds have likely bought exchange-traded funds and a decision by China’s largest brokerage to suspend short selling for some clients failed to stem the wave of local index losses.

The headwinds buffeting the market are well documented: China’s real estate sector remains a flashpoint, deflationary pressures are mounting, and the long-running rift between Beijing and Washington refuses to go away, with the US election looming later this year. In recent days, uncertainty over the path of US interest rates and the threat of an imminent explosion in domestic equity derivatives have heightened investor concerns.

Asian fund managers reduced their allocation to China by 12 percentage points to a net weight of 20%, the lowest level in more than a year, according to the latest Bank of America survey.

Index-tracking fund managers sold $300 million worth of stocks traded in mainland China and Hong Kong this month, according to a Morgan Stanley analysis. This is a reversal from what happened in the last half of 2023, when they bought $700 million on a net basis even as stock indexes declined.

“China is a waiting game, and we’re still waiting,” said Mark Matthews, head of Asia research at Julius Baer & Co., who mostly avoids Chinese stocks.

Beijing’s efforts to reassure investors have been met with skepticism from investors, many of whom worry that authorities are behind the curve. While the People’s Bank of China took steps last month to pump money into the financial system, it bucked widespread expectations by cutting its key interest rate on Monday.

Speaking to leaders at the World Economic Forum this week, Chinese Premier Li Qiang praised his country’s ability to achieve its nearly 5% growth target for 2023 without overwhelming the economy with “massive stimulus.”

Now, the loss of trust has become so severe that attractive reviews are of little use. The MSCI China Index has never been cheap compared to the S&P 500 from a forward earnings appreciation perspective. However, bets on a short-term recovery did not materialize.

“The government seems very optimistic about the economy,” said Shen Yao Ng, investment director for Asian equities at ABRDN Bank. “The market may not even trust the 5% growth number and certainly has a more negative view of the economy.” . “It certainly believes that Beijing needs a significant financial response.”

–With assistance from Sangmi Cha, April Ma, Hideyuki Sano, Carmen Reineke, and Christine Flanagan.

(Updates market movements as US trading begins.)