China’s stock market had a rough 2023 and the rout has accelerated in the first few weeks of the new year, after Beijing dashed hopes that it might do more to support the struggling economy.
Hong Kong’s benchmark Hang Seng Index fell 2.3% Monday, closing at its lowest level since October 2022. The index has lost more than 12% so far this month, nearly as much as it lost in all of 2023.
Mainland China’s Shanghai Composite Index tumbled 2.7% in its biggest daily drop since April 2022. The Shenzhen Component Index, a tech-heavy benchmark, had its worst day in nearly two years, plunging 3.5%. The indexes have tanked 4.8% and 7.7% respectively in the first trading days of 2024.
It’s the worst start to a year for Chinese stocks since 2016, when investors were ditching their holdings following a market crash in 2015. A bubble popped as the economy showed signs of strain and share prices got way ahead of company profits.
In recent months, a real estate crisis, the slowest growth (outside the pandemic) in decades, and a crackdown on some businesses have all combined to undermine investor confidence.
Ken Cheung, chief Asian foreign exchange strategist for Mizuho Bank, said Monday that foreign investors were continuing to “reduce their risk exposure” to China and had “bearish expectations” for business conditions in the country.
“The Chinese government has not yet introduced effective measures to resolve the property turmoil and drive the economic recovery,” he wrote in a note.
Investors were left disappointed on Monday after China’s central bank decided to keep its benchmark lending rate steady. A cut to the rate would lower the cost of borrowing for people and businesses taking out loans or paying down interest, and therefore help stimulate economic activity.
The heavy market losses in 2024 come hot on the heels of a bruising run last year, when the CSI 300 index, comprising 300 major stocks listed in Shanghai and Shenzhen, fell more than 11%.
By contrast, the United States’ benchmark S&P 500 index climbed 24% in 2023, while Europe’s grew almost 13%. Japan’s Nikkei 225 soared 28% last year and is still going strong, notching gains of nearly 10% so far this month.
Demographic data released last Wednesday confirming that China’s population is getting older and smaller hasn’t helped quell investors’ anxieties. They were also perturbed that a speech delivered by Chinese Premier Li Qiang last week at the World Economic Forum failed to mention any new government stimulus measures to help juice the country’s ailing economy.
Brian Martin & Daniel Hynes, analysts at ANZ Research, wrote in a Friday research note that Li’s speech had “doused” expectations of further support measures. “(He) trumpeted the nations’ ability to hit its 5% growth target without flooding the economy with massive stimulus,” they wrote.
In recent months, Beijing has issued $137 billion worth of government bonds, the bulk of which will fund infrastructure projects, while China’s sovereign wealth fund has bought shares to support the country’s sagging stock market.
Li’s speech appears to have dealt another blow to investors already wearied by a raft of disappointing economic data coming out of Beijing, including the ongoing crisis in its real-estate sector and a rapidly shrinking population.
The country’s economy grew by 5.2% last year. That beat government projections but is still one of China’s worst economic performances in over three decades. The International Monetary Fund forecasts the country’s economic growth to slow to 4.2% this year.
In 2023, investors had eagerly anticipated a rebound in China’s economy following Beijing’s decision to scrap its strict zero-Covid policy at the end of the previous year. That robust recovery never came and investors voted with their feet. According to China’s Commerce Ministry, foreign direct investment into the country fell 8% in 2023 compared with the prior year.
Investors have also balked at Beijing’s sweeping crackdown on private enterprise, which began in late 2020 and has included fining foreign companies and detaining their employees in the name of national security.
In his January 16 speech, Li tried to reassure international investors that China presented “not a risk but an opportunity” and pledged to create a “world-class” environment for foreign companies to do business in the country.
He noted that the number of people classed as middle-income in China is expected to double to 800 million over the next decade. “The momentum for consumption … is very strong,” he said.
“Investors who willingly take on exposure to the precarious situation in China need to know the risks or may find themselves at the mercy of an unpredictable and authoritarian financial landscape,” Stephen Innes, managing partner of SPI Asset Management, wrote in a Friday note.
“Success is contingent on buying shares that avoid government scrutiny, making the entire investment process more akin to a game of chance than an informed decision-making process.”