2023 has not been a smart year for Chinese stock markets, to say the least. The Shanghai and Hong Kong CSI indexes ended the year down 11% and 14%, respectively, while the MSCI World Index ended the year up 22%. worst performer among index markets, and now lags behind the S index
Figure 1. China’s CSI Three Hundred Index Performance Against the S Index
China’s stock markets have also had a poor start to the year, with the benchmark CSI 300 index falling to a five-year low in late January. In response, the Chinese government is contemplating emergency measures totaling 2 trillion yuan ($278 billion). These measures would mobilize revenue streams from the offshore accounts of Chinese state-owned enterprises that would buy inventories through the Hong Kong Stock Exchange.
The Chinese government has advocated for this move and state-owned enterprises have begun making purchases to curb capital flight from foreign investors, which has also propelled Chinese retail investors into safer assets. The country’s governing body is also calling for greater regulation and transparency to stabilize markets and boost confidence, according to the Wall Street Journal.
Meanwhile, China’s central bank announced yesterday that it would lower the reserve requirement ratio by half a percentage point to 7 % next month and also ensure that added funding and liquidity was available to property developers.
The big question is whether those measures will buck the trend in the stock and real estate markets.
Several major Wall Street firms are optimistic about the outlook for China’s stock market this year, as the economy has recovered from Covid-19 pandemic restrictions. For example, Goldman Sachs forecasts stock market returns of 18-19% on its China Mushings. comment, assuming that the Chinese economy is developing by about 5% this year.
On the face of it, this is moderate given that official statistics show that China’s economy grew by 5. 2% last year. However, after a closer look at the underlying data, there are reasons to be skeptical about the economy’s performance.
The Rhodium Group, an independent research organization, notes that until mid-2023, symptoms of an economic slowdown were plentiful, as indicated by a steady contraction in the real estate sector and a developing list of defaults among personal property developers. At the same time, China’s overall industry surplus has shrunk because of the pandemic, and Chinese consumers have not spent enough to meet the government’s expansion target. Overall, it estimates that the expansion was closer to 1. 5% last year and expects only a modest cyclical recovery this year.
While the truth may lie somewhere between these estimates, some steps the Chinese government has taken to alter statistics have raised questions about their accuracy. For example, China suspended the release of monthly data on joblessness among young people (16-24 years old) after the figures hit consecutive record highs of 21% in mid-2023. Following criticism of this action, it recently reported an “adjusted” figure that excludes students, which showed a jobless rate of 14.9%.
In a previous Forbes commentary, I cited the reasons why a 5% expansion target consistent with the year is unsustainable: China’s population expansion has slowed particularly because of the legacy of the one-child policy, and returns on investment have fallen as overall productivity has declined. It has more or less halved in 2017 over the past decade. As a result, economic power would have to make a special contribution to achieving the stated objective. Still, many economists wonder how this will be possible, given that Xi Jinping’s economic policies have favored inefficient state-owned enterprises at the expense of the personal sector.
In the face of these structural challenges, it will be difficult for policymakers to regain investor confidence, given their limited tools. First, the government is prevented from expanding spending because of China’s high debt ratio, which amounts to 300% of GDP. Second, while the central bank has room to further ease financial policy in the face of some signs of deflation, it is also looking to stabilize the Chinese currency after its 9% depreciation against the U. S. dollar last year.
So what do foreign investors do in those circumstances?
In my opinion, they deserve to be careful when investing in Chinese stock markets, even if they seem cheap.
Chinese actions are reasonable for two main reasons. First, in light of all that is happening, foreign investors are beginning to wonder if China’s economic miracle is over. Second, some observers consider the weakness of the housing market over the past two years to be just the tip of the iceberg.
In a recent speech, Professor Emeritus Robert Z. Aliber of the University of Chicago Business School mentions several stylized facts about the Chinese real estate market and adds the following: 50 million apartments unoccupied, apartment costs are down 6% from their peak, and spending on new apartments is expected to decline by 2 million units a year. He wonders why he would buy a newly built home when costs on the giant set of vacant apartments are falling. According to him, China could simply enjoy a recession if assets burst bubbles.
Some commentators liken China’s problems to Japan’s in the early 1990s when bubbles in both the stock market and property market burst simultaneously. However, there are two key differences: (i) the extent of over-valuation of China’s stock market is not as great, and (ii) the Chinese government is prepared to bolster financial institutions to deter a run on them.
That said, there’s also a similarity to consider. In fact, the lower the performance of China’s stock market relative to global benchmarks, the more incentive global fund managers will have to underweight Chinese stocks, as they did for decades after the Japanese bubble burst. At the retail level, an increasing number of mutual foreign equity budgets are pushing China away from its benchmarks.
Finally, The Economist notes that nostalgia for China’s boom years of the 1990s is evident in a hit TV show called “Blossoms Shanghai,” whose heroes are the swaggering capitalists of Shanghai in the early 1990s. This is the case, it suggests that foreign companies Investors are the only ones wondering what the direction of the country will be.