Chinese Stocks Plummet Ahead of Crucial Political Meeting

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Investor sentiment toward Chinese stocks has soured significantly ahead of an essential political gathering next week, with traders showing reluctance to bet on a policy-driven recovery. Onshore shares have experienced a downturn since mid-May, plagued by renewed trade tensions, an ongoing property crisis, and a more frugal consumer base, all of which cast a shadow over growth prospects. Although benchmarks remain above the lows seen during the February slump, various indicators suggest market sentiment is nearly just as bleak as it was back then.

The forthcoming Third Plenum, a once-in-five-years meeting that focuses on broader economic strategies and long-term reforms rather than quick market fixes, has tempered expectations for a positive outcome. While China could theoretically resolve its housing crisis with a significant intervention, Bloomberg Economics notes that this scenario is unlikely to unfold. According to Yang Tingwu, a partner at Fujian Tongheng Investment Ltd., “The consensus among investors is that there is almost nothing when it comes to policies unveiled at the meeting that could be potent enough to turn around sentiment. On the flip side, that also means there won’t be much of a disappointment regardless of what the Plenum brings.”

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Several indicators highlight the dire mood in the stock market. Trading volumes have thinned as stocks lost momentum, causing turnover in Shanghai and Shenzhen to drop to levels previously seen during older market downturns. Current trading activity is as sluggish as it was in late September 2022, a time when skepticism peaked due to strict Covid lockdowns and just before the 20th Party Congress. This activity also matches the levels of December that year when a sudden lift in pandemic restrictions led to widespread infections, keeping traders at home.

Outstanding margin balances, often viewed as a proxy for risk appetite, have also declined, although they remain higher than earlier this year. While the benchmark CSI 300 Index is still 8% above its February low, the valuation landscape is almost as dismal. On Wednesday, 856 companies in Shanghai and Shenzhen traded below their book value, compared to 930 during the February nadir. This growing number of firms trading below book value includes financially weak small companies that continue to be sold off, with concerns mounting that some may face delisting due to recent regulatory changes.

The situation isn’t confined to smaller businesses. More than a quarter of companies in the CSI 300 Index reached oversold levels this week, nearing February’s peak. Additionally, just over 10% of Shanghai Composite members are trading above their 50-day moving averages, another sign of poor market breadth.

The loss of market momentum and a lack of compelling catalysts have led foreign investors to largely sell off in all but three sessions over the past month, leading up to Tuesday. If this trend continues, July could mark the second consecutive month of withdrawals and potentially turn year-to-date flows negative, starkly contrasting the influx seen from February to May.