- China’s Hang Seng and CSI 300 indices have experienced significant declines and the yuan has fallen to its lowest level since November, due to the lack of substantial policy support to stimulate the economy.
- Despite China’s attempts to stimulate the economy through interest rate cuts and tax breaks, investor reactions have been muted due to skepticism about the effectiveness of these measures.
- While some remain optimistic about growth potential in the second half of the year, current market trends show bearish sentiment and a lack of confidence in China’s incremental policy easing.
Losses on Chinese assets are mounting again as Beijing’s modest stimulus measures discourage investors.
The Hang Seng China Enterprises Index of Hong Kong-listed Chinese companies fell more than 6% last week to bridge its steepest decline since March. The CSI 300 index of mainland stocks fell 2.5% through Wednesday before markets closed for the holidays. The yuan also fell to its lowest level since November, with analysts bracing for more declines.
There is little reason for mainland traders to be optimistic when markets reopen on Monday. China’s travel spending during the dragon boat festival holiday fell short of pre-Covid levels, underlining the slowdown in consumption. Preliminary estimates from the Passenger Car Association showed over the weekend that passenger car sales for June are expected to fall 5.9% year-on-year.
The gloom sets in after authorities refrained from adding major policy support, even as the economy has lost momentum. Beijing is making it clear that any easing will be targeted and measured, saying goodbye to the days of massive stimulus that drove leverage and inflated asset prices – a disruption the country’s leaders are determined not to repeat.
“This, in my opinion, is a misguided expectation,” said Zhikai Chen, head of Asian and global emerging markets at BNP Paribas Asset Management. “It’s a very uncomfortable situation where positioning is light, valuation is undemanding and sentiment is very bearish.”
To be sure, China has taken measures to stimulate its economy, including a series of interest rate cuts and extensive tax breaks for consumers who buy clean cars. Market reactions are muted as traders are skeptical that these moves will revive an economy weighed down by record levels of debt, slowing global demand and weak business and consumer confidence plagued by years of unpredictable policy shifts.
An analysis by Morgan Stanley’s quant team shows that active long-only managers remained net sellers of Chinese growth and technology stocks in May and June. Meanwhile, hedge funds have added bearish bets as the cohort’s outstanding short positions rose 32% in June, they found.
“It is telling that despite the easing of policy, the market has been unable to stage a sustained rally since the start of the year,” said Eli Lee, head of investment strategy at Bank of Singapore Ltd. they remain determined to contain the long-term increase in leverage in the economy, perhaps not moving the needle.
That doesn’t mean bulls are giving up. Goldman Sachs strategists, including Kinger Lau, said in a June 19 note that a tactical trading window for Chinese stocks is “open again” given low valuations. They recommended buying policy easing beneficiaries, as well as artificial intelligence and state-owned enterprises themes. The MSCI China Index trades at 10.1 times forward earnings, below its five-year average of about 12.1.
“There is a lot of negativity out there, but I think a lot of it is already built into the price,” Ken Peng, head of Asia-Pacific investment strategy at Citi Global Wealth Investments, said in a news conference last week. “The prospect of better growth in the second half is there, but it comes at a much more gradual pace.”
By John Cheng, Bloomberg markets live reporter and strategist through Zerohedge.com
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