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A pedestrian walks past a giant display showing a stock graph in Shanghai on August 3, 2022. Photo: Reuters

Chinese stocks’ post-Shanghai lockdown rally fizzles out as zero-Covid policy and beleaguered property market bite

  • The CSI 300 Index of the biggest stocks on China’s onshore market has lost almost half of the gains that followed the reopening of Shanghai
  • Covid-19 flare-ups and a property market that is in downturn after two decades of growth translate to dim prospects for onshore stocks, analysts say

Traders betting on a post-pandemic rally in Chinese stocks are now facing a reality check, as a run-up spurred by the lifting of Shanghai’s two-month lockdown appears to be sputtering.

The CSI 300 Index of the 300 biggest stocks on the onshore market has dropped 6.8 per cent from a high on July 4, wiping out almost half of the gains that followed the June 1 reopening of China’s commercial and financial hub.

“China’s post-pandemic economic recovery still leads the world, but this advantage could diminish if the country persists with the zero-Covid strategy,” said Preston Caldwell, chairman of the China economics committee at Morningstar in Chicago. “As long as China persists with [the] policy, growth will likely remain weak.”

Recent infection flare-ups have prevented traders from forgetting the lockdown that dragged the economy in the second quarter to its lowest growth rate since the initial Covid-19 outbreak in 2020. For example, investors sold China Tourism Group Duty Free and other consumer stocks last week after authorities in the southern resort city of Sanya imposed a lockdown, leaving about 80,000 visitors stranded.
A man walks past a display showing the Shanghai stock index in Shanghai on August 3, 2022. The CSI 300 Index has lost about half of the gains it made between the end of Shanghai’s lockdown on June 1 and a high on July 4. Photo: Reuters

More worrisome to traders, top leaders now seem to be downplaying the country’s annual GDP growth target, calling into question further stimulus action such as reductions in interest rates or the reserve requirement. A recent Politburo meeting chaired by President Xi Jinping made no reference to the annual growth goal of about 5.5 per cent.

Meanwhile, traders are frustrated by Beijing’s lack of meaningful measures to reverse a slump in home sales after promising to tackle a mortgage boycott movement by ensuring the delivery of unfinished flats. As a result, they remain jittery about the housing market.

Chinese small-caps a safe haven following biggest-ever discount to mega firms

Hong Kong-listed Longfor Group, for example, slumped 16 per cent on Wednesday for no readily apparent reason. Explanations for the rout included UBS Group’s bearish call on the stock and speculation about its failure to repay a commercial bill, which the company later denied.

“The Chinese property market is probably in a secular downturn after two decades of breakneck growth,” said Harmen Overdijk, chief investment officer at Leo Wealth.

All of this is keeping local investors on the sidelines. Overseas buying has partially returned, with net inflows of 6.4 billion yuan (US$950 million) so far in August after a sell-off of 21 billion yuan in July. But monthly flotations of new mutual funds average only 38 billion yuan this year, a fifth of the level in 2021, according to data from Soochow Securities.

2 new Covid-19 infections in Shanghai spark fears of curbs returning

Local traders have taken positions in small-capitalisation companies to provide shelter from market headwinds. But the valuation discount between small-caps and large companies has narrowed from about 8 per cent in June to less than 2 per cent now, prompting a warning about the practice from HSBC Jintrust Fund Management.

Meanwhile, JPMorgan Asset Management has turned positive on Chinese technology stocks trading overseas, citing a less challenging regulatory landscape and better earnings prospects after major technology platforms recalibrated their business models to comply with regulations.

That makes sense from a valuation standpoint. The CSI 300 is valued at 15.6 times earnings, compared with a multiple of 11.4 times for the MSCI China Index of mostly offshore stocks, including Alibaba Group Holding and Tencent Holdings, according to Bloomberg data.

Some technical traders believe the overall stock pullback since July is simply a retracement that precedes further equity gains. But most analysts are struggling to be that optimistic.

“The threat of continued lockdowns, the shift in global spending away from manufactured goods towards services, and the weakening property sector will continue to weigh on activity,” said Overdijk at Leo Wealth. “Activity should pick up in the second half of the year, but at this point, the government’s 5.5 per cent growth target does not look achievable.”