The bet should have been easy. Investors had hoped that the world’s second-largest economy would come back to life after China reopened after nearly three years of pandemic lockdown. Chinese stocks soared.
But the gamble got worse. Chinese stocks trading in Hong Kong plunged more than 20% this week from their January highs, sending them into a temporary bear market. Mainland stocks are also in the red this year.
The decline reflects fading optimism about a possible post-coronavirus recovery in China, which has long driven global economic growth. Despite ongoing geopolitical tensions between China and the United States, economic and business relations between the two countries remain intricately linked.
“All signals from China point to a volatile and stalled recovery,” said Tina Teng, an analyst at CMC Markets in Auckland, New Zealand.
The Chinese government is battling lower-than-expected consumer spending. slowdown in home sales And manufacturing is fluid. A weak currency makes the problem worse. It remains unclear what steps the Chinese government may take to support growth.
Last year, repeated lockdowns caused by the new coronavirus hit the Chinese economy hard. Growth was 3%, one of the slowest in decades, well below the Chinese government’s own target and slower than the 2021 growth rate.
Officials shocked the stock market last fall with stimulus packages aimed at boosting the property sector. In December, the draconian “zero-corona” policy came to an abrupt end, followed by further turmoil. The stock price entered the new year on an upward trajectory, hitting a record high toward the end of January.
In the first three months of the year, China’s economy grew 4.5%, with consumers driving most of that growth, and it appeared to be on a recovery track. Spending, especially on luxury and luxury goods, has been strong in recent months. food and beverage However, it is no longer able to meet the expectations of investors. High youth unemployment further darkens the outlook. While the West is battling inflation, China is at the mercy of its opposite, potentially more pernicious force: deflation, persistently low prices that drag the economy down by pushing down corporate profits and wages. there is
“Domestic demand remains weak,” Ten said.
As a result, many economists have cut back on expectations in recent weeks, contributing to the stock market’s decline. But many analysts, including those at investment bank Nomura and Barclays, still expect China’s gross domestic product (GDP) to grow this year at a faster pace than the government’s call for 5% growth.
The US economy, the world’s largest economy, is underperforming, but US stocks far outperform Chinese stocks. The S&P 500 index, a composite stock index, is up about 10% this year.
Recent decisions by the Chinese Communist Party and its supreme leader Xi Jinping have hurt sentiment in the stock market. The crackdown on foreign-linked consulting and advisory firms has spooked some foreign firms and investors and reignited questions about the viability of international companies doing business in China.
Nomura economists said in a report last month that the economic recovery has stalled, partly because the Chinese government has failed to build consumer and business investor confidence. “As the disappointment sets in, the risk of a downward spiral is increasing, which we see as weaker activity indicators, rising unemployment, sustained disinflation, lower market interest rates and a weaker currency.”
But some observers argue that investors just made a mistake about reopening the Chinese economy, which is not a historically similar event. And it overlooks the shift in authorities’ prioritization of national security concerns over economic ones.
“The mentality of how the Chinese economy is managed is completely different,” said Chris Leong, chief China economist at DBS Bank. He added that the authorities are unlikely to respond to the stock market slump by taking as aggressive steps to boost stock prices as they have in the past. Policy makers in Beijing are placing more emphasis on economic leaders such as manufacturing. And according to these indicators, the Chinese economy “isn’t far off,” Leong said.
On Thursday, a private sector inquiry revealed that factory activity in China has been affected. picked up in mayThat contrasted with official data released the day before, which showed the continued contraction in manufacturing. China’s manufacturing sector is closely linked to exports, which serve as an indicator of global demand, so mixed signals have a broader impact. A sustained increase in manufacturing will boost China’s employment rate, consumer spending and ultimately the stock market.
For now, investors continue to offload Chinese stocks. Companies with the biggest losses this year include online retailer JD.com and hot pot chain Haidilao, both of which have fallen more than 20% this year.It helped push Hong Kong down Hang Seng China Enterprise Index It reached its lowest level of the year on Thursday. After gaining on Friday, the index is down about 17% from its January high.of CSI 300 IndexThe index, which tracks the largest companies listed in Shanghai and Shenzhen, is down about 8% from its peak in January.
The real estate sector continues to be a headache for investors. Data released this week by the China Real Estate Information Corporation showed property sales by the 100 largest firms fell about 14% in May from the previous month.
China’s housing problem, with developers taking on too much debt and renters leaving half-baked apartments, has prompted speculation that the People’s Bank of China will be forced to cut interest rates later this year. ing.
Both Nomura and Barclays expect China to see a significantly higher economic growth of around 8% in the three months to June. According to both forecasts, growth in the next two quarters of this year will moderate toward levels seen earlier this year.
In the process, analysts expect stock market performance to improve. “Excessive pessimism is usually self-correcting,” Leon says.
