Chinese stocks are encountering increasing bearish signals as one of the country’s significant annual policy meetings approaches.
On Monday, the Hang Seng China Enterprises Index declined by 1.5%, extending its fall from a peak on May 20 to over 9%, nearing a technical correction. Similarly, the CSI 300 Index on the mainland recorded its fifth consecutive session of losses, marking its longest losing streak since early 2012, following a seventh week of declines last Friday.
Earlier this year, a rally in Chinese equities began losing steam due to an uneven economic recovery and mounting concerns about potential geopolitical risks surrounding elections in Europe and the United States. Investors are not optimistic about an immediate market boost from the Third Plenum, scheduled from July 15 to 18, which will convene about 400 top government officials, military leaders, provincial governors, and academics in Beijing to set the country’s political and economic direction.
Despite previous stimulus efforts, there has been minimal impact on China’s struggling property sector and consumer confidence.
Xin-Yao Ng, director of investment at abrdn Asia Ltd., commented, “The Chinese domestic economy remains weak, and there is little anticipation for significant stimulus from the Third Plenum. Negative sentiment from European elections is adding to uncertainties, particularly with regards to their stance toward China amid the influence of more left-wing parties.”
Sentiment among onshore Chinese investors is notably fragile, with the CSI 300 index wiping out all gains for the year, and the Shanghai Stock Exchange Composite Index trading below the psychologically crucial 3,000-point mark since June 21. Small-cap stocks, identified by Goldman Sachs as particularly vulnerable to economic slowdowns, have faced substantial challenges throughout the year.
Recent activity suggests that China’s so-called national team, potentially backed by state funds, may have intervened to bolster market confidence ahead of the plenum. Certain exchange-traded funds preferred by China’s sovereign wealth fund have reported significant inflows since the Shanghai stock index dipped below the 3,000 level. State intervention was pivotal earlier this year in stabilizing the market during a February downturn.
“Investors are closely monitoring macroeconomic and policy developments in China but are not rushing back into the market despite record-low exposure in recent years,” noted Morgan Stanley strategists, including Laura Wang, following a recent U.S. marketing trip. “Challenges such as currency depreciation, geopolitical uncertainties, and China’s macroeconomic issues remain immediate hurdles.”
