Since its peak in 2021, Chinese stocks have lost a staggering $6 trillion in market capitalization. Investors have grown anxious about the instability of the property market and an underwhelming economic recovery. Factors such as international politics and uncertain domestic policies have further eroded confidence among investors, households, and businesses.
According to Sean Taylor, Chief Investment Officer for Matthews Asia in Hong Kong, there has been a significant decrease in fund flows. Additionally, many Chinese investors are trying to move money outside of China, which is an unprecedented trend. The recent wave of selling can be attributed to derivatives and leverage in the Hong Kong market, contributing to what seems like a fire sale. While other markets have experienced upward momentum, the MSCI China has declined by 12% since the beginning of the year.
The iShares MSCI China exchange-traded fund (MCHI), which includes Chinese stocks traded in Hong Kong, the U.S., and the onshore A-shares market experienced a modest 1% increase to $36.42 on Monday. Similarly, the onshore iShares MSCI China A-shares fund (CNYA) saw a slight gain of just 0.5% to $23.19. These gains are relatively modest considering the significant sell-off witnessed this year.
The Chinese Stock Market: Opportunities and Concerns
Howie Schwab, manager of Driehaus Capital Management's emerging-markets growth strategy, believes that policymakers cannot simply force the market to rise without addressing these fundamental challenges. He emphasizes that the government has to tackle the root causes of the market's problems in order to achieve sustainable growth. Schwab suggests that the increased focus on market weakness by government officials indicates a growing concern over the market's volatility and fragility. He suggests that introducing measures aimed at stabilizing the property and financial markets could potentially lead to a bottoming out of the market, as the saying goes, "markets bottom when policymakers panic."
According to Matthews' Taylor, while valuations in the Chinese stock market are very low, expectations for earnings growth at Chinese companies remain unrealistically high, averaging around 15%. Taylor anticipates that actual growth will likely be around half of this optimistic estimate, and as a result, stock prices should eventually align with this more modest growth rate within the next quarter.
Taylor also points out that while significant stimulus measures from Beijing are not expected, he does not foresee further downward pressure on the market either. He believes that all the economy needs is a restoration of confidence and increased stability in the property markets. Taylor acknowledges that this will take time but remains optimistic, asserting that the outlook for the Chinese stock market will improve within the next six to nine months.
In conclusion, the Chinese stock market presents both opportunities and concerns for investors. While the low valuations are enticing, there are underlying issues that need to be addressed for sustainable growth. The recognition of these problems by policymakers is a positive step, but further measures to stabilize the property and financial markets are necessary. With time, increased confidence and stability should lead to a better outlook for the market.