Chinese stocks in Hong Kong enter bearish territory

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Chinese stocks in Hong Kong have fallen into bearish territory amid growing doubts over the outlook for the world’s second-largest economy and rising tensions between Washington and Beijing

Declines in the Hang Seng China Enterprises Index during Asian trading on Tuesday pushed it 20% below its January high, putting it in bearish territory. A decline in China’s benchmark CSI 300 index of stocks listed in Shanghai and Shenzhen also led to a decline of more than 10% from its peak this year, meeting the technical definition of a market correction.

The relentless sell-off in Chinese equities reflects a growing consensus among investors that the the economic recovery is running out of steamabout six months after Beijing abandoned President Xi Jinping’s disruptive zero Covid policy.

Winnie Wu, China equity strategist at Bank of America, said clients had described many Chinese stocks as “too cheap to be short, but not good enough to be long”. Wu said that while Chinese equity valuations had turned attractive, the recovery remained weaker than expected and the economy would likely continue to underperform without greater state support.

“We expect 2023 to be a year of weak stimulus, given China’s already high debt-to-GDP [ratio]the tight fiscal position of the local government and the long-term challenges in the real estate market,” Wu said.

Slowing momentum in several sectors over the past few weeks has weighed on Chinese equities against their global peers. While the S&P 500 index has climbed more than 10% since the start of the year, the index of Chinese companies has fallen by more than 7% during this period.

Investors are particularly concerned about the property market, where the most recent data shows sales down more than a third from pre-pandemic levels, and record unemployment among Chinese youth, including one in five is now unemployed.

Other factors, including heightened geopolitical tensions with the United States, accelerated the sell-off. Traders said Tuesday’s losses were partly spurred by China’s decision to refuse a request from the United States for a meeting between defense officials at an upcoming security forum in Singapore.

“It’s the economy, yes, but it’s also more than that,” said Louis Tse, managing director of Hong Kong-based brokerage Wealthy Securities.

Tse said the interest rate differential between the United States and China was driving exits from China’s government bond market, adding to downward pressure on the renminbi, while geopolitical tensions with states United States fueled the concerns of foreign investors.

“US and European fund managers don’t want to hold Chinese assets in their portfolios at this time,” Tse said. “The economy, the risk premium from US-China tensions, low market turnover and the renminbi – all of this is combining to boost sales.”