Why has China’s stock market slumped and what lies ahead?

China’s stock market had a rocky 2023 and its fortunes have not changed this year, with the country’s equities benchmark enduring its worst start to a year since 2016.

But what has led to such a dismal performance for one of the fastest-growing stock markets in the pre-coronavirus world? Have investors suddenly decided to vote with their feet and head for the doors?

The Chinese stock market performance is reflective of a consistent erosion of investor confidence in the world’s second-largest economy, its clampdown on the technology, payments and financial industries, as well its property sector that keep on adding new names to a long list of embattled developers, analysts say.

China’s rather disappointingly slow recovery from the coronavirus-induced slowdown and its underwhelming response in bailing out the battered property sector have further eroded confidence.

Policymakers in China are now considering a 2 trillion yuan ($278 billion) intervention to support the country’s sagging equities market and protect retail investors stung by their property sector exposure, according to reports.

But can an equities-specific rescue plan have the desired effect, or does it have to be a wider effort that includes financial and policy support for ailing sectors of the broader Chinese economy?

Stock market performance

Stock markets in Hong Kong and Shanghai tumbled last year as global investors left. The CSI 300 index, comprising 300 major stocks listed in Shanghai and Shenzhen, dropped 21.6 per cent over the past 12 months. Hong Kong’s Hang Seng index fell by about 29 per cent over the same period, according to Bloomberg data.

The performance of Chinese stocks is in stark contrast to global equities indexes that rose despite economic headwinds last year. The US benchmark S&P 500 index climbed 24 per cent in 2023, while the European index grew by about 13 per cent as Japan’s Nikkei 225 posted a 28 per cent jump last year.

Both US and Japanese stocks have had a positive start to the year, in contrast to Chinese equities, which have lost more than $6 trillion in market value since their 2021 peak.

The value of China’s equity market has never been this far behind that of the US, according to Bloomberg data.

“Having recorded back-to-back down years in equities, and with a well-documented set of macro and geopolitical challenges, it will naturally take time for investor confidence in China to recover,” Allianz Global Investors said in its China Equity Outlook 2024 report.

“Expectations have completely reversed since the end of 2020, when China’s Covid-free economy was riding high. Indeed, recent market performance indicates it is this year’s macro weakness, which is now being extrapolated into the future.”

State of the Chinese economy

The country’s economy grew by 5.2 last year, slightly higher than the government estimate. However, the pace of growth in the country is at its weakest in more than 30 years.

The International Monetary Fund expects Chinese gross domestic product growth to slow to 4.2 per cent this year.

Although China’s long-term growth is expected to beat that of most western economies, policy stimulus will be needed this year for the country to achieve the projected growth level of 4.5 per cent to 5 per cent.

“Policy support, with a potentially greater use of fiscal policy, is likely to be judiciously deployed to limit downside risks,” said Fitch Ratings, which also expects mainland China’s growth to moderate.

However, such policy support “may keep fiscal deficits wide and put further upward pressure on the debt ratio”, the rating agency said in its 2024 outlook for the Chinese economy.

Crackdowns and troubled property sector

The troubles for the Chinese stock market did not surface overnight.

Beijing started to clamp down on technology and payments companies in late 2020 and the enforcement of new regulations on competition, consumer behaviour and data security resulted in significant market capitalisation loss for many stocks such as Alibaba.

The high-growth payments sector, which helped to keep the broader stock market on an upward trajectory for years, lost momentum and the ensuing crisis in the country’s property market dented equities further.

Since then, several Chinese developers, including China Evergrande and Country Garden, have defaulted on their offshore debt and are being restructured.

Their failure does not bode well for the sector, which accounts for about a quarter of the Chinese economy.

The greater China region will continue to face “growth headwinds from external demand, which is still subdued, and property-sector challenges in mainland China”, Fitch said.

Allianz…