Beijing’s latest efforts to stop the rout in the stock market will likely fail, but the fact that authorities are paying increased attention could mean prices are getting close to finding a floor.
Chinese stocks have lost $6 trillion in market capitalization since their high in 2021 as investors have grown concerned about a property market that has yet to stabilize and an economic recovery that has underwhelmed expectations. Questions about international politics and the direction of domestic policy have hit confidence among investors, households, and businesses.
“Fund flows aren’t coming through and a lot of Chinese investors are actually trying to put money outside of China, which hasn’t happened in the past,” said Sean Taylor, the Hong Kong-based chief investment officer for Matthews Asia.
Local investors have become even more pessimistic than foreigners, Taylor said. Much of the latest tranche of selling, he said, is a result of derivatives and leverage in the Hong Kong market, contributing to a fire sale of sorts. The MSCI China is down 12% so far this year even as other markets have charged higher.
The selloff has grabbed the attention of authorities. On Sunday, the China Securities Regulatory Commission said it would crack down on “vicious short selling” and other types of market manipulation while it bolsters efforts to stabilize markets and steady confidence. It will expand curbs on certain types of trading.
The iShares MSCI China exchange-traded fund (
MCHI
), which holds Chinese stocks traded in Hong Kong, the U.S., and the onshore A-shares market, rose 1% to $36.42 on Monday. The onshore iShares MSCI China A-shares fund (
CNYA
) gained just 0.5% to $23.19. Those are modest gains given the heavy selling so far this year.
The Chinese stock market is among the cheapest in the world, but investors have hesitated to jump in. Authorities will need to do more than ban short selling, warn against “negative market tactics” and limit the use of algorithmic and automatic trading to woo them back.
“Policymakers cannot force markets higher without addressing the underlying economic and financial fissures plaguing the market,” said Howie Schwab, manager of Driehaus Capital Management’s emerging-markets growth strategy.
But the silver lining for investors may be that the latest efforts by policymakers are at least a recognition of the problem. “The continuing reference to market weakness does suggest government officials are growing increasingly concerned over the volatility and seeming fragility,” Schwab told Barron’s.
“The adage ‘markets bottom when policymakers panic’ may ring true if officials are willing to introduce measures aimed at meaningfully stabilizing the property and financial markets,” Schwab said.
Although valuations are very low, Matthews’ Taylor said, expectations for earnings growth at Chinese companies are still too high at an average of 15%. Taylor expects growth to come in at about half that—and that stock prices will come to reflect that over the next quarter.
While Taylor doesn’t expect big stimulus from Beijing, he also doesn’t expect much more downside in the market. “The economy just needs confidence to come back and more stabilization in property markets, which is taking time,” Taylor said. “The outlook will be better in six to nine months.”
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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