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Chinese equities have suffered a brutal sell-off since China reported a strong first-quarter of economic growth, in a sign of investor doubts over whether the country can sustain its rebound.
Stocks included in the benchmark indices of the Shanghai and Shenzhen stock exchanges have together lost almost Rmb3.6tn ($519bn) in market capitalisation since April 18, when China reported annual quarterly growth of 4.5 per cent. The market value of companies included in the Nasdaq Golden Dragon index, which tracks China’s top New York-listed tech groups, has also dropped by more than $31bn.
The sell-off reflects uncertainty on the outlook for China’s economy and apprehension that the economic recovery from years of Beijing’s disruptive zero-Covid policy could falter in the coming months — even though the headline number reported by Beijing, in its first full quarter since authorities ended the zero-Covid approach, exceeded most forecasts.
Analysts said the outperformance from headline growth may have actually helped spur the sell-off, since it implied there was less need than many domestic investors expected for the sort of stimulus that typically helped boost share prices in China.
Tommy Xie, head of Greater China Research at OCBC Bank, said market sentiment in China had worsened further after the central bank failed to even hint at the possibility of future stimulus measures last week.
Zou Lan, head of the monetary policy department of the People’s Bank of China, said at a briefing in Beijing on Friday that the central bank would keep its monetary policy “precise and forceful”. He added the central bank would keep the credit supply “reasonably stable”.
Those comparatively reserved comments proved a disappointment to the many retail investors who often help drive broader market trends in China. “The market had priced in a cut in interest rate, but such hopes faded after the PBoC briefing last week,” Xie said.
Despite such concerns among mom-and-pop investors, recent data points to robust credit growth and high turnover at mainland stock exchanges — conditions that Thomas Gatley, an analyst with Beijing-based consultancy Gavekal Dragonomics, normally correlate with equity rallies in China.
Gatley said the sharp losses for stocks in the face of otherwise supportive conditions might reflect a broad lack of confidence in policy support going forward, with recent online discussion in China focusing on how policymakers “have pushed credit growth hard already, so [now] they’re going to slow down”.
“There may be a sense that policymakers’ hand on the tiller is not necessarily as stable as people once thought — or is not as growth-oriented,” he added, pointing to prolonged regulatory clampdowns on the tech and property sectors which once served to power the high-growth heart of the country’s economic growth and entrepreneurial drive.
The selling has not been restricted solely to Chinese punters. Calculations based on exchange data show that offshore investors have dumped more than Rmb12.6bn (about $2bn) worth of Shanghai- and Shenzhen-listed equities since the release of gross domestic product data.
“Obviously, it’s not usual” for global investors to dump Chinese stocks following better than expected headline economic growth, said Kinger Lau, chief China equity strategist at Goldman Sachs.
Lau said some recent selling was probably driven by profit-taking and reports that the White House may announce wider restrictions on US investment in China at this month’s G7 summit in May. But he added that “right now, the biggest issue is that confidence levels remain quite low among private companies and entrepreneurs”.
While data released alongside first-quarter GDP growth last week showed substantial growth in both retail sales and exports for March, investment in the private sector — which has less ready access to lending compared with state-run companies in China — has lagged behind.
Growth in China’s vital property sector, which has struggled to exit a liquidity crisis brought on by a sector-wide crackdown on leverage in recent years, has also remained sluggish.
“Investors are looking for more clarity about earnings in the next week or so before making any decisions on whether to engage with Chinese stocks,” Lau said, “but overall, we feel pretty strongly that the fundamentals are going to improve in the months ahead.”
But even if corporate earnings do exceed market expectations, recent rhetoric from top officials has already soured sentiment.
On Tuesday evening, state broadcaster CCTV fuelled concerns over the outlook for China’s vital property sector when it announced that the central government had finally finished setting up a national real estate registration system, long framed by top officials as a necessary precursor to imposing a nationwide property tax. Analysts said any such tax would further discourage Chinese homebuyers.
“I don’t think [policymakers] are foolish enough to say ‘we’ve wiped out a third of our developers, this is a good time to introduce a new barrier to households looking to buy their first homes,’” said Chen Zhikai, head of Asian equities at BNP Paribas Asset Management.
But he granted that it was “fair to say there is some scepticism in terms of how strong growth has been” in some sectors of China’s economy.
Chen said the focus for global investors was now first-quarter earnings reports planned for release in the coming weeks, as well as the April policy meeting of the Chinese Communist party’s politburo, which will probably be held this week.
Until then, he said, “we’re in a vacuum”.
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