TLDR:
- Chinese stocks tumbled, with CSI 300 Index dropping 7.1% in one day
- Investors are skeptical about the pace and effectiveness of Beijing’s stimulus measures
- Holiday spending data showed muted consumer sentiment despite signs of stabilization
- Global money managers are turning to selective stock-picking in Chinese markets
- Analysts are divided on whether now is the right time to invest in Chinese stocks
China’s stock market has experienced a dramatic series of ups and downs in recent days, as investors grapple with the government’s economic stimulus measures and underlying economic challenges.
The CSI 300 Index, a key benchmark for Chinese stocks, plunged 7.1% on Wednesday, erasing gains from the previous day when mainland markets reopened after the Golden Week holidays.
This marked the index’s largest single-day decline since February 2020.
The volatility in Chinese stocks comes as investors reassess their expectations for government stimulus. While equities had rallied in recent weeks following a series of policy announcements aimed at supporting the economy, enthusiasm has cooled due to the lack of major new initiatives at a key policy meeting on Tuesday.
Many market participants now say Beijing needs to back up its spending pledges with concrete action.
Adding to the market’s concerns, data on holiday spending during the recent Golden Week break suggested that consumer sentiment remains subdued. While the number of domestic trips increased by 10.2% compared to 2019, spending only rose by 7.9%, indicating that consumers are still cautious with their wallets.
The Chinese government has set an ambitious economic growth target of around 5% for 2024, but achieving this goal may prove challenging given the current economic headwinds.
The property sector, long a key driver of Chinese growth, continues to struggle, and domestic demand remains weak. These factors have contributed to deflationary pressures in the economy.
In response to these challenges, Beijing has announced a series of stimulus measures, including interest rate cuts, lower reserve requirements for banks, and mortgage relief.
However, many investors and analysts argue that more substantial fiscal support is needed to truly jumpstart the economy.
Some banks, including Morgan Stanley and HSBC, expect a stimulus package worth around 2 trillion yuan ($283 billion), while Citigroup has suggested it could reach 3 trillion yuan.
The recent market volatility has also highlighted the growing importance of stock selection for investors in Chinese markets.
Some fund managers are advising clients to take profits in sectors that have seen significant gains, such as insurance and electric vehicles, while identifying potential value in areas like internet companies, sportswear, and tourism.
Global investment banks have offered mixed views on the outlook for Chinese stocks. Goldman Sachs recently upgraded China stocks to Overweight, citing potential upside of 15-20% for major indices.
The bank argued that the latest easing package has positively surprised investors and altered the policy narrative. Similarly, HSBC and BlackRock have also upgraded their outlook on mainland Chinese stocks.
However, other market observers remain cautious. Jeremy Schwartz, chief investment officer at WisdomTree, noted that while the recent stimulus has improved sentiment, it’s still unclear whether it will be enough to significantly move the economy. He also highlighted the complex geopolitical environment and the upcoming U.S. election as factors that could complicate the investment thesis for China.
The Chinese Finance Ministry has announced that it will hold a briefing on fiscal policy, with Finance Minister Lan Fo’an set to introduce new measures to strengthen fiscal support for economic growth.
This announcement has generated some optimism among investors, but many remain in a “wait-and-see” mode, looking for concrete evidence of economic improvement before fully committing to Chinese equities.
In the meantime, leveraged equity positions have jumped, potentially increasing market vulnerability if a sustained downturn were to occur. The outstanding amount of margin debt in Shanghai and Shenzhen exchanges rose to 1.54 trillion yuan ($218 billion) on Tuesday, up 7.4% from the last trading session on September 30.
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