China stocks are bull traps as market regulators’ pain threshold remains untested: BCA Research

More than a week of stock sell-offs will be needed for policymakers to halt regulatory reforms, strategists at BCA Research say in report

China has traded short-term pain for long-term benefits under its multi-year growth planning; that pain threshold remains untested by stock slump

Reading Time:2 minutes

China’s crackdown on the tech and private education sectors is likely to weigh on Chinese stocks for the next six to 12 months, according to BCA Research. Photo: Bloomberg

Published: 5:45pm, 4 Aug 2021Updated: 6:12pm, 4 Aug 2021

Investors should avoid Chinese stocks for now because more losses are likely to unfold over the next six to 12 months, according to BCA Research. The fallout from its regulatory actions in the technology and private education sectors has not tested the policymakers’ pain threshold, it added.

“More than a week of stock sell-offs will be needed for policymakers to halt reforms,” strategists led by Sima Jing said in a report to clients on Wednesday. “Furthermore, even if the pace of reforms eases and policymakers start to reflate the economy, it will likely take between six and 12 months for stock prices to find a bottom.”

BCA, which correctly told clients to go neutral on Chinese stocks in January and underweight in March relative to global benchmarks, said the country’s macro policy setting has shifted to allow a higher tolerance for short-term pain in exchange for long-term gain.

China’s economic policy has shifted from setting an annual economic growth target to multi-year planning, affording policymakers a higher tolerance for near-term distress in exchange for long-term benefits, they added. Despite a deep dive in stock prices, China’s bond and currency markets have been stable relative to the gyrations during the 2015 and 2018 market routs.

Mainland stocks suffered a US$434 billion slide in July, sparked by a cybersecurity review soon after ride-hailing firm Didi Global completed its US$4.4 billion listing in New York. In Hong Kong, investors took at US$752 billion drubbing. Combined, the US$1.2 trillion sell-off was the most since January 2016, according to Bloomberg data.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x