The wager was supposed to be a no-brainer. China was reopening after nearly three years of pandemic lockdowns, and investors expected that its economy, the world’s second-largest, would come roaring back to life. Chinese stocks soared.
But that bet has soured. This week, Chinese stocks that are traded in Hong Kong sank briefly into a bear market, after losing more than 20% of their value from a high in January. Stocks on the mainland are also in the red for the year.
The declines reflect a fizzling optimism in the viability of the post-COVID recovery in China, which has long been a driver of global growth. Despite the continuing geopolitical tensions between China and the United States, the economic and business ties between the two countries remain intricately linked.
“All the signals from China are pointing to a bumpy, faltering economic rebound,” said Tina Teng, an analyst with CMC Markets in Auckland, New Zealand.
Beijing is contending with weaker-than-expected consumer spending, slowing home sales and a manufacturing sector in flux. A weaker currency is compounding the problems. It remains uncertain what, if any, action the Chinese government might take to support growth.
Last year, numerous COVID lockdowns took a heavy toll on China’s economy. It grew 3%, a rate that was one of the slowest in decades, well short of Beijing’s own target and slower than that of 2021.
The authorities gave the stock market a jolt last fall with stimulus measures designed to support the property sector. Another bump followed in December, with the abrupt end of the strict “zero COVID” policy. Stocks entered the new year on an upward trajectory and peaked toward the end of January.
In the first three months of the year, China’s economy grew 4.5% — with consumers responsible for the bulk of the gain — and appeared on track for a recovery. Spending has been strong in recent months, notably in the luxury and food and beverage sectors, but increasingly hasn’t met investors’ expectations. A high rate of youth unemployment further darkens the outlook. While countries in the West contend with inflation, China is flirting with the opposite and potentially more malign force of deflation, or persistently low prices that drag on the economy by dampening company profits and wages.
“Domestic demand is still weak,” Teng said.
Consequently, many economists have dialed back their expectations in recent weeks, contributing to the stock market decline. But a number of analysts, including those at the investment banks Nomura and Barclays, still expect China’s gross domestic product this year to increase at a faster rate than the government’s forecast, which calls for 5% growth.
Projections for the U.S. economy, the world’s largest, are lower, but American stocks are faring much better than China’s. The S&P 500, a broad index of stocks, is up about 10% this year.
Recent decisions by the Communist Party of China and its top leader, Xi Jinping, have hurt stock market sentiment. A crackdown on consulting and advisory firms with overseas ties has spooked some foreign businesses and investors, reigniting questions about the viability of international firms doing business in China.
“The recovery has stalled, due partly to Beijing’s inability to boost confidence among consumers and business investors,” Nomura economists wrote in a report last month. “As disappointment kicks in, we see a rising risk of a downward spiral, resulting in weaker activity data, rising unemployment, persistent disinflation, falling market interest rates and a weaker currency.”
But some observers argue that investors have just misjudged the reopening of the economy in China — an event that has no historical parallel. And they have missed a shift in how the authorities prioritize national security concerns over economic ones.
“The mentality of the way the Chinese economy is managed is completely different,” said Chris Leung, the chief China economist at DBS Bank. The authorities, he added, are not as likely as they were in the past to respond to a stock market slump by taking aggressive steps to drive up share prices. Policymakers in Beijing are focused more on economic bellwethers like manufacturing. And by those measures, Leung said, the Chinese economy “is not too out of line.”
On Thursday, a private-sector survey showed that factory activity in China had picked up in May, in contrast to official data released a day earlier that showed that manufacturing had continued to contract. The mixed signals have broader implications, because manufacturing in China is closely linked to its exports, which, in turn, are an indicator of global demand. A sustained increase in manufacturing would help bump up China’s employment rate, consumer spending and, eventually, its stock market.
For now, investors continue to offload Chinese stocks. Some of the biggest losers this year include the online retailer JD.com and the hot pot chain Haidilao, both down over 20% this year. That helped push down Hong Kong’s Hang Seng China Enterprises Index to the lowest closing level of the year on Thursday. After a rally on Friday, the index is about 17% lower than its high in January. The CSI 300 Index, which tracks the biggest companies listed in Shanghai and Shenzhen, is down about 8% since peaking in January.
The real estate sector continues to be a source of anguish for investors. Property sales from the 100 biggest firms fell about 14% in May from the previous month, according to data released this week by China Real Estate Information Corp.
China’s housing problems — developers that are deep in debt and borrowers who are left with half-finished apartments — have led to expectations that the Chinese central bank will feel compelled to cut rates later this year.
Both Nomura and Barclays forecast that China will post significantly higher economic growth — of almost 8% — in the three months ending in June. Growth for the next two quarters of the year will then moderate toward levels seen earlier this year, according to both projections.
Along the way, analysts expect stock market performance to improve. “Excessive pessimism usually corrects itself,” Leung said.
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