F-22Raptor
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- Jun 18, 2014
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A deepening selloff in Chinese stocks is exacerbating a crisis of confidence in the world’s second-largest economy, heaping pressure on policymakers to halt the downward spiral.
A benchmark index of the nation’s onshore shares is near the lowest levels since January 2019, yet another reflection of the depth of the market gloom. Down almost 7% this year, the CSI 300 Index is staring at an unprecedented fourth annual drop, while an MSCI Inc. gauge of Chinese stocks is heading for its longest stretch of underperformance versus global equities since the turn of the century.
Selling pressure is mounting as China’s property crisis drags down consumer spending and geopolitical tensions simmer before US elections in November. The risk for Xi Jinping’s government is that the market slump further erodes confidence among consumers and businesses, spurring a deflationary feedback loop for the economy.
That’s one reason why state-backed funds have spent billions of dollars trying to prop up stock prices, to little avail.
While investors have urged authorities to roll out more forceful economic stimulus, Beijing has so far shown no appetite for the kind of big bang measures that helped revived the economy and stock markets in past cycles.
“It’s been an amazingly bad period for markets — the problem is the economy is in a worse place than I thought six months ago,” Ron Temple, chief market strategist at Lazard Asset Management, said in a Monday interview in London. “The longer the government refuses to create any major demand stimulus, the longer the consumer confidence damage will persist, and the harder it will be to resolve.”
It’s not that policymakers haven’t acted to fix the problems. Just this year, state funds are estimated to have purchased around $66 billion worth of exchange-traded funds to prop up stocks through mid-August.
Restrictions have been tightened over quant trading and short selling in a bid to reduce volatility, while companies are urged to boost buybacks and dividend payouts. In February, China replacedthe head of its securities regulator in a surprise move.
For investors, however, the measures have been underwhelming. And China doesn’t seem willing to pursue a different economic track that will empower businesses. The risk is that the stock market will be stuck in a limbo as China enters an era of slow growth, lacking the vigor of an emerging market and the stability of a developed one.
China’s poor performance is in stark contrast to a bull run in global stocks this year, underscoring investors’ skepticism towards Xi’s vision of China. The CSI 300 is now close to levels seen in early 2019, whereas benchmarks in the US, Japan and India have nearly — or more than — doubled their levels during this period. Increased state control over private businesses and growing trade rifts as China seeks industrial self-sufficiency are among the fundamental causes that have made the nation’s stocks unpalatable for many.
In all, about $6.5 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.
That’s almost equal to the size of Japan’s equity market. On Tuesday, the CSI 300 index fell as much as 0.7% before recovering to finish 0.1% higher as data showed exports unexpectedly accelerated in August. The gauge is down almost 4% in September after a four-month losing streak.
While there have been a few rebounds over the past several years, most have flopped in a matter of weeks as the grim economic reality hit home. There were hopes that things might be different this year as Chinese benchmarks advanced from February through mid-May. That has proved to be another false dawn as economic weakness persisted and earnings failed to recover.
Earnings per share for the MSCI China Index fell 4.5% from a year earlier in the second quarter, the worst performance in five quarters, according to data from Bloomberg Intelligence.
“The China and Hong Kong investors I know are so disappointed, they are cutting down their already low exposure, feeling hopeless,” said Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd, who’s been covering the market for 30 years. “Quantitative easing-type government liquidity is the only way out.”
The latest economic data released from China have intensified such concerns. Deflation stalking China since last year is showing signs of spiraling, with expectations that a broader measure of economy-wide prices known as the gross domestic product deflator will likely extend its current five-quarter drop into 2025. The danger is deflation could snowball by encouraging households to cut back on spending, or delay purchases because they expect prices to fall further. Corporate revenues will suffer, leading to further salary cuts and layoffs.
A growing number of Wall Street analysts are predicting China may miss its economic growth goal of about 5% this year. While that may alarm Beijing, policymakers appear to be in a bind.
The People’s Bank of China is wary of cutting interest rates aggressively and further widening the gap with US rates, which would add depreciation pressure on the yuan.
President Xi’s focus on the quality of growth has also seen Chinese officials hold off on aggressive stimulus moves. After a deleveraging push to deflate a property bubble led to the current crisis and scores of defaults among developers, authorities are reluctant to dramatically shift tack lest it builds up unwanted leverage.
“The market has been looking for a policy boost, but policy has been coming at piecemeal pace. It’s like putting a patient on life support not performing a desperately needed surgery,” said Hao Hong, chief economist for Grow Investment Group. “To instill confidence back into the economy, the government should stop all market-interfering activities, and let the market and people do their work.”
A benchmark index of the nation’s onshore shares is near the lowest levels since January 2019, yet another reflection of the depth of the market gloom. Down almost 7% this year, the CSI 300 Index is staring at an unprecedented fourth annual drop, while an MSCI Inc. gauge of Chinese stocks is heading for its longest stretch of underperformance versus global equities since the turn of the century.
Selling pressure is mounting as China’s property crisis drags down consumer spending and geopolitical tensions simmer before US elections in November. The risk for Xi Jinping’s government is that the market slump further erodes confidence among consumers and businesses, spurring a deflationary feedback loop for the economy.
That’s one reason why state-backed funds have spent billions of dollars trying to prop up stock prices, to little avail.
While investors have urged authorities to roll out more forceful economic stimulus, Beijing has so far shown no appetite for the kind of big bang measures that helped revived the economy and stock markets in past cycles.
“It’s been an amazingly bad period for markets — the problem is the economy is in a worse place than I thought six months ago,” Ron Temple, chief market strategist at Lazard Asset Management, said in a Monday interview in London. “The longer the government refuses to create any major demand stimulus, the longer the consumer confidence damage will persist, and the harder it will be to resolve.”
It’s not that policymakers haven’t acted to fix the problems. Just this year, state funds are estimated to have purchased around $66 billion worth of exchange-traded funds to prop up stocks through mid-August.
Restrictions have been tightened over quant trading and short selling in a bid to reduce volatility, while companies are urged to boost buybacks and dividend payouts. In February, China replacedthe head of its securities regulator in a surprise move.
For investors, however, the measures have been underwhelming. And China doesn’t seem willing to pursue a different economic track that will empower businesses. The risk is that the stock market will be stuck in a limbo as China enters an era of slow growth, lacking the vigor of an emerging market and the stability of a developed one.
China’s poor performance is in stark contrast to a bull run in global stocks this year, underscoring investors’ skepticism towards Xi’s vision of China. The CSI 300 is now close to levels seen in early 2019, whereas benchmarks in the US, Japan and India have nearly — or more than — doubled their levels during this period. Increased state control over private businesses and growing trade rifts as China seeks industrial self-sufficiency are among the fundamental causes that have made the nation’s stocks unpalatable for many.
In all, about $6.5 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.
That’s almost equal to the size of Japan’s equity market. On Tuesday, the CSI 300 index fell as much as 0.7% before recovering to finish 0.1% higher as data showed exports unexpectedly accelerated in August. The gauge is down almost 4% in September after a four-month losing streak.
While there have been a few rebounds over the past several years, most have flopped in a matter of weeks as the grim economic reality hit home. There were hopes that things might be different this year as Chinese benchmarks advanced from February through mid-May. That has proved to be another false dawn as economic weakness persisted and earnings failed to recover.
Earnings per share for the MSCI China Index fell 4.5% from a year earlier in the second quarter, the worst performance in five quarters, according to data from Bloomberg Intelligence.
“The China and Hong Kong investors I know are so disappointed, they are cutting down their already low exposure, feeling hopeless,” said Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd, who’s been covering the market for 30 years. “Quantitative easing-type government liquidity is the only way out.”
The latest economic data released from China have intensified such concerns. Deflation stalking China since last year is showing signs of spiraling, with expectations that a broader measure of economy-wide prices known as the gross domestic product deflator will likely extend its current five-quarter drop into 2025. The danger is deflation could snowball by encouraging households to cut back on spending, or delay purchases because they expect prices to fall further. Corporate revenues will suffer, leading to further salary cuts and layoffs.
A growing number of Wall Street analysts are predicting China may miss its economic growth goal of about 5% this year. While that may alarm Beijing, policymakers appear to be in a bind.
The People’s Bank of China is wary of cutting interest rates aggressively and further widening the gap with US rates, which would add depreciation pressure on the yuan.
President Xi’s focus on the quality of growth has also seen Chinese officials hold off on aggressive stimulus moves. After a deleveraging push to deflate a property bubble led to the current crisis and scores of defaults among developers, authorities are reluctant to dramatically shift tack lest it builds up unwanted leverage.
“The market has been looking for a policy boost, but policy has been coming at piecemeal pace. It’s like putting a patient on life support not performing a desperately needed surgery,” said Hao Hong, chief economist for Grow Investment Group. “To instill confidence back into the economy, the government should stop all market-interfering activities, and let the market and people do their work.”