Chinese stocks are approaching a bear market.
On Monday, the Shanghai Composite plunged 8.5% in its worst single-day percentage decline in eight years. And on Wednesday, the index opened 4% lower, although the session was more mixed.
In a note Tuesday, Goldman analysts highlight five reasons why Chinese stocks are selling off.
- The State Council is due to deliver a statement Friday that could signal a wider trading band for the renminbi. Investors are concerned that this could make the currency more volatile, and spark a flight of capital out of China.
- The July manufacturing PMI fell month-over-month and missed expectations in June, at 48.2 versus 49.4 the prior month, and 49.7 expected according to the Bloomberg consensus.
- Many investors don’t find the risk/reward profile attractive anymore.
- The government intervened strongly in the stock market, but that’s making investors wary. The whisper is that the government has sponsored about $US100 bn of stock purchases — supply that would eventually need to be absorbed.
- Foreign investors aren’t bullish on the market, either. Goldman has gleaned from recent conversations that the suspension of stocks has soured sentiment towards A shares. Up to 52% of listed companies were suspended at the peak on July 9th.