China stocks in Hong Kong enter bear market territory

Chinese stocks in Hong Kong fell into bear market territory amid mounting doubts about the outlook for the world’s second-largest economy and rising tensions between Washington and Beijing

Declines for the Hang Seng China Enterprises index during Asian trading on Tuesday pushed it 20 per cent lower from its peak in January, placing it in bear territory. A drop for China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks also dragged that more than 10 per cent lower from its peak this year, matching the technical definition of a market correction.

The relentless sell-off in Chinese equities reflects a growing consensus among investors that the country’s economic recovery is losing steam, roughly half a year after Beijing abandoned President Xi Jinping’s disruptive zero-Covid policy.

Winnie Wu, China equity strategist at Bank of America, said clients had described many Chinese stocks as “too cheap to short, but not good enough to go long”. Wu said that while valuations for China shares had become attractive, the recovery remained weaker than anticipated and the economy was likely to continue underperforming without more substantial state support.

“We expect 2023 to be a year of weak stimulus, given China’s already high debt-GDP [ratio], stretched local government fiscal position, and long-term challenges in the property market,” Wu said.

Slowing momentum across multiple sectors in recent weeks has dragged on Chinese stocks relative to their global peers. Whereas the S&P 500 index has climbed more than 10 per cent year to date, the China Enterprises index is down more than 7 per cent during that period.

Investors are particularly worried about the property market, where the most recent data shows sales down more than a third from pre-pandemic levels, and about record joblessness among Chinese youth, one in five of whom is now unemployed.

Other factors, including worsening geopolitical tensions with the US, have accelerated the sell-off. Traders said losses on Tuesday were partly spurred by China’s decision to decline a request from the US for a meeting between defence officials at an upcoming security forum in Singapore.

“It’s the economy, yes, but it’s also more than that,” said Louis Tse, managing director at Hong Kong-based brokerage Wealthy Securities.

Tse said the interest rate differential between the US and China was driving outflows from China’s government bond market, adding to downward pressure on the renminbi, while geopolitical tensions with the US were stoking worries among foreign investors.

“US and European fund managers don’t want to hold Chinese assets in their portfolios right now,” Tse said. “The economy, the risk premium from US-China tensions, slim market turnover and the renminbi — all of these are coming together to drive more selling.”