Four months after China’s State Council released a nine-point document aimed at restoring investor confidence and attracting long-term capital, the market has gone from a relieved upswing to a downward spiral once again. Signs that investors are shying away from stocks are clear: Trading volumes on the Shanghai and Shenzhen stock exchanges have fallen to their lowest levels in four years, the benchmark CSI300 index has lost a tenth of its value from this year’s high, and rapid sector rotations have dominated trading. Instead, investors are snapping up other assets, from bonds to exchange-traded funds (ETFs) tracking overseas stocks to luxury homes in tier-one cities. This frenzy stands in stark contrast to the slump in stock prices, with benchmark government bond yields falling to record lows, ETFs tracking U.S. and Japanese stocks trading at a premium to their net asset value, and new luxury homes selling out.
It’s a setback for Wu Qing, chairman of the China Securities Regulatory Commission, who has rolled out a string of measures since taking office in February, from promising to improve the quality of listed companies to cracking down on short selling. The government support helped stocks recover briefly, but worries about the outlook for economic growth and corporate earnings have driven investors away.
“The China market remains very frustrating for investors,” said Gary Duggan, CEO of Global CIO Office in Dubai, which serves family offices, asset managers and ultra-high net worth individuals. “Investors are looking for concrete, large-scale action from the government. The market is looking to [can] “It’s not going to boost growth in the short term. If there is an effective stimulus package for the economy, there could be more upside for the market.”
Investors are disappointed that no stronger additional measures were taken to mitigate and address the prolonged slump, especially in the real estate market, following the Third Plenum of the Communist Party of China and the subsequent Politburo meeting. At the two meetings, top leaders pledged to achieve an annual gross domestic product target of about 5 percent, stimulating optimism for stronger policy support for growth in the near term.
Instead, the People’s Bank of China cut its policy interest rate and long-term prime lending rate after two meetings, disappointing stock traders and triggering a flight to safe havens.
“The Politburo statement acknowledged the economic slump and promised steps to address that weakness, but no new specific policies,” said Ronald Temple, chief market strategist at Lazard Asset Management. “The Politburo stressed the need to resolve the housing problem, but did not offer any meaningful new measures to absorb the excess supply of housing units or stimulate consumption across the economy.”
Temple reversed a view he had made earlier this year that Chinese growth had bottomed, adding that “China is likely to become a drag on global growth again in 2024 and 2025.”
China’s fragile economic recovery continued in July, with growth in new bank loans falling to the slowest level in 14 years and industrial production weaker than expected, while retail sales beat expectations slightly.
The CSI300 index is down about 10% from its highest this year hit on May 20, and daily trading volume on the Shanghai and Shenzhen exchanges fell to 472.9 billion yuan ($66.1 billion) last week, the lowest since May 2020 and well below the daily average of 589 billion yuan this month and 790 billion yuan this year.
Even the most drastic measures taken by the China Securities Regulatory Commission have not restored confidence. A month ago, the commission suspended the securities re-lending business of China Securities Finance, a state-run credit trading company that lent stocks to short sellers. That effectively wiped out short sellers, sending open balances to their lowest in more than four years as they scrambled to unwind trades to avoid the clampdown.
In China, opaque personnel changes at senior financial officials and ongoing cleanup of the securities industry are also unsettling investors and keeping them speculating about policy intentions.
Last month, the China Securities Regulatory Commission suddenly fired its Vice Chairman, Fang Xinghai, a reform-minded and outspoken official who had been instrumental in facilitating communication between the commission and foreign investors. Though Fang had just passed the mandatory retirement age of 60, his resignation stoked concerns about further opening up of capital markets, especially amid an exodus of foreign investors. A week later, Harvest Fund Management chairman Zhao Xuejun was formally investigated for no apparent reason. Beijing-based Harvest is China’s fourth-largest mutual fund company, managing 1.57 trillion yuan in assets. Before that, the government had launched investigations into several Shanghai Stock Exchange executives and the head of the China Securities Regulatory Commission’s eastern branch in Jiangsu province. All these developments, combined with a dire outlook for the economy, have China’s 220 million retail investors, the world’s largest group of individual investors, refraining from making new investments. Of the 532.4 billion yuan of new mutual funds set up in the first half of the year, only 600 million yuan was focused on equities, while the rest was aimed at bond products, industry data showed.
To be sure, some optimists argue that downside risks are limited and that stocks look attractive compared with bonds, which have record-low yields.
“In terms of valuation, Hong Kong and China stocks are currently trading at the lower end of their historical ranges, which could provide an attractive entry point for long-term investors,” said William Fong, head of Hong Kong and China equities at Baring Asset Management in Hong Kong. “From a bottom-up perspective, we see strong structural growth opportunities at attractive prices as the economy gradually normalizes.”
He said infrastructure, healthcare and technology stocks were likely to outperform as they benefited from the nation’s strategy of pursuing sustainable growth, technological innovation and environmental awareness.
Chinese insurers, with more than 30 trillion yuan in assets, will likely gradually switch to equities as a rapid decline in bond yields squeezes investment returns for the industry, said Meng Lei, a strategist at UBS Group AG. The yield on China’s benchmark 10-year government bond fell to a record low of 2.124% on Aug. 2.
“The inflow of funds from insurance companies [to stocks] “It’s not going to happen overnight,” Meng said. “We will gradually increase positions as fundamentals change and earnings recover.”
The CSI 300 index is currently valued at 11.6 times this year’s expected earnings, compared with 23.2 times for the S&P 500 index and 21.2 times for the Nikkei average, according to Bloomberg data.
Despite these advantages, investors remain vigilant to avoid falling into the so-called “valuation trap” — when falling corporate earnings lead to cheap valuations.
UBS surprised stock traders last month with an unusual downgrade of premium baijiu maker Kweichow Moutai. The bank projected that the liquor giant’s compound annual profit growth will slow to 8% from 2023 to 2025, just over half the rate from 2020 to 2023, due to shrinking demand due to weak consumer spending.
For now, investors are sticking to asset classes other than stocks. Some are betting the bond market’s record rally will continue, despite the People’s Bank of China’s repeated warnings of the potential risks of low yields that could lead to huge investment losses if growth accelerates. They argue that deflationary trends in producer prices will prompt further interest rate cuts to stimulate demand for fixed-income products. China’s factory prices fell for the 22nd straight month in July, while consumer price inflation has stayed below 1% for 17 straight months.
Diversifying overseas is also a popular strategy adopted by Chinese investors. Buying of domestic ETFs tracking U.S. and Japanese stocks, both of which have hit record highs this year, has been so frenzied that asset managers have been forced to issue repeated statements warning investors of the risks.
An ETF managed by China Asset Management Co Ltd tracking the Nikkei average was trading at a 21% premium to its net asset value at one point this year, according to data compiled by Bloomberg, while the premium for its S&P 500 index hit a record 18%, highlighting strong demand in the secondary market.
In addition to those options, wealthy Chinese investors are turning to niche sectors in the country’s struggling property market, pouring money into luxury homes in first-tier cities in the hope that limited supply will protect their wealth.
In China’s largest city, Shanghai, about 1,600 properties priced at more than 30 million yuan were sold in the first half of the year, up nearly 40 percent from a year earlier, according to China Real Estate Information Corp. Most of these apartments are located in the city center, where land supply for residential apartments is in short supply.
“If you really want to find a safe haven for your capital now, high-end homes in big cities like Shanghai are your best choice,” said Yang Yuejing, deputy director of E-House China Real Estate Research and Development Institute in Shanghai. “No matter how housing prices fluctuate, these high-end properties are rare and can meet the demand for wealth preservation and growth.”
For now, signs of an upswing in stock prices are few and far between, so overseas investors are pulling back.
“Nobody in China or Hong Kong [stocks] “It’s on their radar now,” said Brooke McConnell, president of South Ocean Management.
“The improvement is slow but not enough to get anyone excited yet. Patients are lying still in bed. The market is waiting for more information from Beijing.”
