Rescuing the Chinese market fails as Xi backs off stimulus

Rescuing the Chinese market fails as Xi backs off stimulus

(Bloomberg) — China’s regulators face a losing battle to persuade global funds to invest in Chinese stocks unless market-boosting efforts are accompanied by stronger stimulus to support growth.

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Officials have taken a series of measures in recent days to improve flagging sentiment in the world’s second-largest stock market. They’ve urged financial institutions to snap up shares, encouraged companies to step up buybacks, and told mutual funds to stop selling. To no avail, with the MSCI China Index down 1.3% at the close of local markets on Friday.

“Investors were disappointed by the lack of concrete measures to boost the economy,” said Karen Hearn, partner at asset management firm East Capital. “Without stronger action by the government and while political tensions between China and the West continue, the market may continue its downward trend.”

The MSCI China Index fell 11% this month, marking its worst performance since October and putting it in the red for the third year in a row. Country Gardens Holdings Co., formerly China’s largest developer, led losses in August with a 49% drop amid fears the company would default on its dollar debt.

Global funds fled the mainland market, offloading nearly $11 billion in a series of withdrawals that lasted 13 days through Wednesday, the longest since Bloomberg began tracking the data in 2016. Wall Street analysts also became more pessimistic, With Morgan Stanley and Goldman Sachs. Group Inc. downgraded dropped its targets on Chinese stocks last week, after starting the year on a positive note.

Despite promises of pro-growth policies by the country’s top leaders at the Politburo meeting on July 24, little has been done to counteract the slowdown. This has drawn attention to President Xi Jinping’s determination to shift away from the debt-driven growth model of his predecessors.

Read more: Don’t Go Cold: Why Xi Jinping Lets China’s Economy Collapse

Matt Malley, chief market strategist at Miller Tabak + Co, said the Chinese government is once again flipping the agreed-upon forecasts just as it did in 2021 when the authorities cracked down on private enterprises.

“The same thing is happening this year, with Chinese officials responding in a less aggressive manner to the weakness in their economy than expected,” Malley said. “It shows that China does not care at all what others think they should do. China will do what its leadership thinks is best for it.”

Read More: China’s Stimulus Rise Lasts Just 10 Minutes, Showing Trader’s Gloom

The latest economic figures suggest a bleak reading. Bank loans fell to their lowest level in 14 years in July, the downturn began and exports contracted. Zhongzhi Enterprise Group, one of China’s largest shadow banks, has halted payments on dozens of high-yield investment products since last month, raising fears of contagion from the slumping real estate market.

Morgan Stanley, JPMorgan Chase and Barclays plc now see China missing the government’s growth target of around 5% for 2023 – a far cry from sentiment this spring, when that target was widely seen as conservative. Excessively.

“People are concerned about the lack of a policy response,” said Dave Perrett, co-head of Asian investment at M&G Investments. “They look forward to the next three to six months and don’t see the economy getting much better and people getting worried about contagion as a result.”

Read more: Everything China is doing to stimulate its flagging economy

The latest rout comes after several years of disappointing market performance. This widened the gap between the financial markets in China and the financial markets in the United States to near-historic levels.

Chinese stocks and the Chinese currency are near their weakest levels compared to their US counterparts since at least 2007. The flight to safety and easier monetary policy fueled gains in Chinese government bonds, pushing the two-year yield discount against Treasuries to its highest level since 2007. The widest since 2006.

The data “all lead to a weaker conviction among international investors to justify the risk they are taking on Chinese equities versus assets elsewhere with a better perceived risk reward,” said Xiadong Bao, fund manager at Edmond de Rothschild Asset Management in Paris.

Officials still hope to convince foreign investors. Bloomberg News reported on Friday that the securities regulator plans to hold a meeting with some of the world’s largest asset managers in Hong Kong including Fidelity International Ltd and Goldman Sachs.

What global fund managers are looking for is evidence of an improving economy, according to Matthew Buterba, senior analyst at Richard Bernstein Advisors.

“Foreign investors are incredibly pessimistic about Chinese stocks right now,” Buterba said. “Many managers are still underinvested in Chinese equities and will need to see more tangible signs of a lasting recovery before turning around again.”

–With the help of Wenjin Lv.

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