China faces tough market rescue amid slowdown concerns

In the latest attempt to woo investors back to its flagging equities market, China has lowered the stamp duty on stock trades for the first time since 2008 and pledged to slow the pace of initial public offerings.
But China’s regulators are facing a tough battle convincing global funds to invest in the nation’s stocks unless market boosting efforts are accompanied by stronger stimulus to support growth.
The CSI 300 Index has declined about 4% in 2023 after back-to-back annual losses and is underperforming a broader gauge of Asian equities by about six percentage points.
Yesterday, Chinese stocks added to their advance from Monday as some investors saw merit in Beijing’s latest measures to invigorate markets.
But the absence of runaway gains shows investor sentiment remains cautious. Officials have undertaken a flurry of measures in recent days to improve battered sentiment in the world’s second-largest stock market. They’ve urged financial institutions to snap up equities, encouraged companies to boost buybacks, and asked mutual funds to stop selling.
The MSCI China index has tumbled 11% this month. Global funds have been fleeing the mainland market, offloading almost $11bn in a 13-day run of withdrawals through last Wednesday, the longest since Bloomberg began tracking the data in 2016.
Wall Street analysts are also turning more downbeat, with Morgan Stanley and Goldman Sachs Group lowering their targets on Chinese stocks, after starting the year on a positive note.
Global investors have been shedding China’s blue-chip stocks during the longest stretch of outflows on record, showing even the nation’s industry leaders are falling out of favour as a rout deepens.
Their departure comes as a prolonged housing slump raises the risk of broader financial contagion, making the nation’s equity benchmark among the worst global performers this month with a nearly 8% loss.
China’s latest economic figures make for grim reading. Bank loans plunged to a 14-year low in July, deflation has set in and exports are contracting.
Zhongzhi Enterprise Group Co, one of China’s biggest shadow banks, halted payments on scores of high-yield investment products since last month, prompting concern of contagion from the slumping property market.
Morgan Stanley, JPMorgan Chase and Barclays now see China missing a government-set growth target of around 5% for 2023: A far cry from the sentiment this spring, when that goal was widely viewed as overly conservative.
Morgan Stanley lowered its price targets for major Chinese and Hong Kong stock indexes for the second time in three months, as Wall Street turns more cautious on the world’s second-largest economy. The bank cut its base-case June 2024 target for the MSCI China index to 60, down 14% from its earlier projection. The index risks slumping to 40, or a drop of 33% from its current level of around 60, in Morgan Stanley’s bear-case outlook.
Chinese stocks have become cheap after their recent declines, but that isn’t enough to lure buyers who have more attractive options in South Korea and Taiwan, according to Schroders.
The recent rout comes after several years of disappointing market performance. That’s widened the gap between China’s financial markets and that of the US to near-historic levels.
Chinese shares and the currency are close to their weakest level relative to their US peers since at least 2007.
Beijing’s efforts to revive investor confidence suggest the slump in Chinese equities has reached a level that policymakers can no longer turn a blind eye to.
What global fund managers are looking for is evidence of an improving economy, according to Matthew Poterba, senior analyst at Richard Bernstein Advisors.
“Foreign investors are incredibly pessimistic on Chinese equities right now,” Poterba said. “Many managers remain underinvested in Chinese stocks and will need to see more concrete signs of a durable recovery before inching back in.”