Macroscope | China’s battered stock market is down but not out

As the Lunar New Year holiday approaches, rays of hope are piercing through the dark clouds enveloping China’s stock market. Mounting speculation that Beijing is readying more forceful measures to prop up the battered market – a staggering US$7 trillion has been wiped off shares in mainland China and Hong Kong since their 2021 peaks – has lifted sentiment.

On Tuesday, the benchmark CSI 300 index had its best day since early November 2022, while the CSI 1000 gauge of small stocks enjoyed its sharpest daily gain since 2008. After so many false dawns, that mere hints of support can still trigger a dramatic rebound shows all is not lost for Chinese equities.

Many foreign investors would disagree. At a recent Goldman Sachs conference in Hong Kong, more than 40 per cent of investors surveyed said Chinese stocks were “uninvestable”. Another recent poll by Bank of America found that “chronic disappointment” had turned investors away from Chinese equities, with nearly 40 per cent looking for opportunities elsewhere.

The damage to investor confidence over the past three years has been colossal. The combination of regulatory crackdowns on parts of the private sector, the draconian zero-Covid policy, a much weaker-than-expected post-pandemic recovery, the housing market crisis and geopolitical tensions has had a devastating impact on sentiment.

Selling pressure in equity markets has been indiscriminate. Even sectors dominated by more resilient state-owned enterprises, such as utilities and industrials, have suffered. Small stocks have borne the brunt: the CSI 1000 is down by more than 18 per cent this year. This has coincided with a rapid unwinding of margin debt for stock trades, increasing the risk of further declines as investors are forced to liquidate their positions.