Chinese stocks are nearing a five-year low last seen in February, as bearish sentiment takes hold amidst ongoing economic challenges and a lack of earnings recovery.
CSI 300 Index Declines
On Monday, the CSI 300 Index (000300.SS) closed down 1.2%, marking a decline of over 13% from its peak in May this year. Should this downward trend continue, the benchmark could reach levels not seen since early 2019. This decline suggests that extensive policy efforts to rejuvenate the economy and bolster stock prices have yet to yield significant results. Additionally, the yuan has weakened in response to the market’s downturn.
Cycle of Low Sentiment
The market has been caught in a cycle where stocks hit new lows following brief rebounds fueled by fleeting optimism. The government’s fragmented stimulus measures have failed to restore confidence, with persistent deflationary pressures, weak consumer spending, and a prolonged property slump undermining hopes for a near-term economic recovery.
Analysts’ Perspectives
Billy Leung, an investment strategist at Global X Management, attributes the ongoing bearish sentiment in Chinese stocks to deteriorating short-term dynamics, particularly deflationary pressures and weakening consumer demand. Leung suggests that without a significant policy shift, especially in fiscal support for social welfare or housing, negative sentiment is likely to persist.
Previous Rebound and Current Decline
The CSI 300 Index experienced a 16% rebound from February to mid-May, fueled by state funds purchasing exchange-traded funds and regulatory crackdowns on short sales and quantitative trading. However, the subsequent decline underscores the failure of these policies to address the underlying issues affecting market sentiment.
Diverse Opinions from Financial Institutions
Even historically bullish institutions like UBS Global Wealth Management, Nomura Holdings Inc., and JPMorgan Chase & Co. have downgraded their outlooks for Chinese equities recently. Their concerns include reduced property-driven demand, insufficient stimulus measures, and escalating geopolitical tensions ahead of the US elections.
Impact on Global Commodity Demand
China’s economic slowdown has also affected global commodity markets. Iron ore prices fell below $90 per ton for the first time since 2022, as industrial commodities face pressure from sluggish Chinese demand. Additionally, the onshore yuan weakened by up to 0.2% against the dollar on Monday.
Opportunities Amidst Challenges
Despite the gloomy outlook, some investors view the ultra-cheap valuations of Chinese equities as presenting good risk-reward opportunities. The MSCI China Index is trading at less than nine times forward price-to-earnings, compared to 24 for India’s emerging market index.
Challenges for Chinese Stocks
The CSI 300 Index is approaching levels seen during the February downturn, exacerbated by exit orders from structured products and a shift of investments to Indian stocks. Vivian Lin Thurston, a portfolio manager at William Blair Investment Management, notes that even leading Chinese companies are not immune to the persistently weak economic environment and limited prospects for improvement. Domestic policy trends and geopolitical risks may continue to pressure Chinese stock valuations.
Decline in Earnings
Earnings per share for the MSCI China Index fell 4.5% year-over-year in the second quarter, marking the worst performance in five quarters, according to Bloomberg Intelligence. The decline is underscored by weakening support from the country’s largest tech firms.
Conclusion
Down nearly 7% this year, the CSI 300 Index ranks among the world’s worst-performing major indices and is on track for a record fourth consecutive year of losses. The ongoing economic difficulties and lack of effective policy responses continue to cast a shadow over the Chinese stock market.
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