Chinese stocks plunged to their lowest levels in 5 years on Monday, as concerns over the country’s sluggish economic recovery and rising geopolitical tensions weighed heavily on investor sentiment.
Sharp Losses Across Chinese Markets
The benchmark Shanghai Composite Index sank 1.8% to finish at 2,987.95 points, its weakest close since January 2019. In Hong Kong, the Hang Seng Index dived 2.1% to 18,297.29, extending its loss so far this year to over 5%.
Chinese technology firms bore the brunt of the sell-off, with the Hang Seng Tech Index sliding 3.8% to its lowest since November 2022. Shares of Alibaba and Baidu each shed over 3%, while JD.com plummeted 7.1%.
Key Index Levels (Jan 8 Close)
Index Level Change (Jan 2)
Shanghai Composite 2,987.95 -1.8%
Hang Seng 18,297.29 -2.1%
Hang Seng Tech 3,864.09 -3.8%
Other major Asian indices also closed lower on the first trading day of 2024, though losses were less severe than in China. Japan’s Nikkei 225 fell 0.2%, while South Korea’s Kospi dropped 0.3%.
Deteriorating Economic Outlook
The sharp losses came on the heels of disappointing economic data out of China. The country’s official manufacturing Purchasing Managers’ Index (PMI) fell for a third straight month in December to 47.0, remaining below the 50-point mark separating expansion from contraction.
The weak PMI print “hinted at sustained economic weakness” in China, said Martin Hennecke, Asia investment director at St. James’s Place Wealth Management. It reinforced fears that China’s post-COVID recovery was losing steam.
Monday’s stock plunge also came after the release of the meeting minutes from the U.S. Federal Reserve’s December policy gathering. The minutes dampened hopes that the Fed would pause or reverse its interest rate hikes anytime soon. Higher U.S. rates tend to draw capital away from emerging markets like China.
On Tuesday, investors will be parsing China’s December trade figures for further clues on the health of the world’s second-largest economy. Economists expect exports likely slowed further last month amid waning overseas demand.
Flare-up in U.S.-China Tensions
Geopolitical tensions also kept pressure on Chinese markets Monday, as U.S. authorities downed a suspected Chinese spy balloon that had floated across American airspace.
Secretary of State Antony Blinken abruptly canceled a high-stakes Beijing trip planned for Sunday after the discovery of the balloon. The incident marked a new low in relations between the global superpowers.
“It’s definitely raising the tension and distrust between the two countries again,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privée.
The spy balloon controversy came just weeks after the U.S. imposed export controls aimed at thwarting China’s technological and military ambitions.
Grim Start to 2024
Monday’s rout capped a dismal start to 2024 for Chinese stocks, which had already declined sharply at the open of trade last week. Signs of revived COVID outbreaks in China further sapped optimism.
“It’s a continuation of the bearish sentiment that we saw last year,” said Willer Chen, an analyst at Forsyth Barr Asia. “The macro headwinds from the slowing Chinese economy and effects of the global slowdown have not abated.”
Chinese markets vastly underperformed the S&P 500 and other global peers in 2022 as the economy grappled with repeated COVID waves, a real estate crisis and regulatory crackdowns on the technology, education and other sectors.
While analysts do not expect a rebound anytime soon, some see Chinese stocks as attractive on a relative valuation basis after the selloff.
“We’ve seen pretty extreme pessimism set in,” said Brendan Ahern, chief investment officer at Krane Funds Advisors. “That typically sets up at least for a tradeable rally.”
Outlook Remains Murky
However, until China provides greater policy clarity and stimulus to stabilize growth, headwinds are likely to persist, analysts say.
Beijing’s strict COVID policies and support for embattled property developers have underwhelmed investors hoping for more forceful measures. The latest economic data suggests the government faces an uphill battle to reach its GDP growth target this year.
Moreover, while the Fed’s minutes reduced expectations for U.S. rate cuts in 2023, they reiterated that rates could rise further. This could spell more pain ahead for emerging market assets.
“Rates are still seen trending higher globally, something that doesn’t bode well for Hong Kong and China markets,” said Jun Rong Yeap, market strategist at IG Asia. “This suggests equities are likely to remain pressured.”
So while bargain-hunting investors may scoop up battered Chinese stocks at fresh multi-year lows, significant upside seems unlikely with the economic and geopolitical environments still shrouded in uncertainty.
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