Chinese stocks plunged to their lowest levels in over a year this week, as disappointing economic data and falling property prices stoked fears of a deeper slowdown in the world’s second-largest economy.
Key Developments
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The benchmark Shanghai Composite index fell 1.2% on Thursday to its lowest close since November 2020, bringing losses so far this year to over 5%.
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Hong Kong’s Hang Seng index sank even further, dropping 3.7% to finish at its lowest since April 2009. The index is now down over 12% since the start of 2023.
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Several key economic indicators came in weaker than expected for December, including GDP growth of 2.9% (below forecasts for 3.6%), retail sales down 1.8%, and property investment falling at its fastest pace in over 30 years.
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Adding to the gloom, new home prices fell for a seventh straight month in December. The property downturn is putting further strain on an already distressed real estate sector.
Impact on Chinese Stocks
The dismal economic figures weighed heavily on Chinese shares this week, dragging down stocks across a range of sectors:
| Company | % Change This Week |
|---|---|
| Alibaba | -8.2% |
| Tencent | -7.1% |
| China Life Insurance | -12.3% |
| Country Garden | -18.6% |
Two of China’s largest tech giants, Alibaba and Tencent, saw their Hong Kong-listed shares hit 52-week lows this week. Other firms with heavy exposure to China’s troubled property market, like developer Country Garden, plunged even further.
The wave of selling has brought Chinese stock valuations down to attractive levels, with forward P/E ratios now at 12-year lows. However, analysts caution that earnings estimates may still have further to fall if China’s economy continues to lose steam.
Dashed Hopes for Rate Cuts, Stimulus
Behind the sharp stock selloff are fading hopes that China’s central bank could swoop in with monetary stimulus to prop up the flagging economy.
The People’s Bank of China (PBoC) has held its key policy rates steady this month, even as economic conditions worsen. That’s led investors to pare back expectations for interest rate cuts in the near-term.
With rates still relatively high after last year’s hikes to control debt growth, there is also less scope now for China to turn on the stimulus taps. After relying heavily on infrastructure spending and loose credit to drive growth, regulators have pledged to focus more on financial stability.
Outlook: More Pain Before a Turnaround
Most economists expect China’s downturn to deepen in the first half of 2023 before stabilizing later in the year.
Ongoing Covid disruptions, weak global demand, and stresses in the property market will continue acting as brakes in the near-term. However, if lockdowns ease and government support ramps up, activity could rebound modestly in H2 2023.
But the days of 6-7% Chinese growth rates are likely gone. Demographic challenges and the transition toward slower but higher-quality growth will see expansion trend closer to 3-5% in coming years.
That dimmer long-term outlook means Chinese stocks may face a drawn-out recovery even after this year’s massive sell-off. Investors will need to see convincing signs of an upturn before sentiment truly bottoms.
With so much bad news already priced in though, patient bargain-hunters could find opportunities amid the rubble. Distressed valuations in sectors like tech, insurance, and select high-quality developers seem poised to reward those with longer time horizons.
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