Why Chinese Stocks Have Been Taking A Massive Walloping

The Shanghai Composite fell 0.7 per cent in overnight trading, reaching a new 3.5-year low, and down 2.7 per cent in August. The index fell as investors were disappointed by Beijing’s failure to announce policy inaction.

The Shanghai Composite was down for the fourth straight month in August, it’s “longest monthly losing streak since 2004”, according to Bloomberg.

Chinese stocks have taken a beating not only on account of the economic slowdown, but also because of a decline in corporate earnings.

First lets take a look at macro data. Talks of a Chinese hard landing began to surface late last year as analysts warned of an economic slowdown and pointed to declines in manufacturing and external demand for Chinese goods and services.

Chinese trade data took its first massive blow in April, when export and import growth slowed down. But as of July, exports slumped to 1 per cent year-over-year (YoY) growth, and imports slowed to 4.7 per cent YoY growth. Imports are closely watched as an indicator for a Chinese hard landing, since they have a large domestic demand component to them. 

In an effort to curb speculation in the real estate sector and cool inflation, Chinese policymakers had tightened policy in 2011. But in recent months, deflation became a real concern because of its potential to impact employment.

But investors have been getting weary of a slump in corporate earnings. Societe Generale’s Wei Yao has previously written that China is experiencing a profitless growth. Companies are seeing a slowdown in orders, rising inventories and bankruptcies have become more common. In fact more than half the 760 companies listed on the domestic stock market reported YoY declines in first-half net profits.

Despite recent reports that China would not announce a stimulus, cut interest rates, or announce reserve requirement ratio cuts, investors had expected some easing after a deteriorating in manufacturing data, only to be disappointed. This is likely part of Beijing’s efforts to maintain a “firm grip” on its real estate market.

Bottom-line: There are two key things behind the bearish sentiment on China according to Yao. The first is  “the market’s uneasiness to accept a structurally lower growth rate”, and more importantly, it’s the fact that “the burden of the economic slowdown is disproportionally greater on corporates”.

For now, some still speculate that policymakers will step in to stabilise growth and the stock market before the leadership handover in October.

Here’s a chart from Yahoo Finance that shows how the Shanghai Composite has performed in the past year compared with the S&P500 and Dow:

shanghai composite v/s S&P500 chart

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