- The Chinese stock market crash could be the breaking point for foreign investors, said Jeremy Mark of the Atlantic Council.
- The market becomes more volatile as remaining investors focus on quick profits.
- The country must respond to its real estate crisis in order to initiate a stable market recovery.
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The decline of China's stock market may have left long-term scars as foreign investors are unlikely to return, the Atlantic Council wrote on Friday.
Across domestic and U.S. indices, Chinese companies have collectively suffered a $7 trillion hit since the start of 2021. The fallout could be the final breaking point for offshore traders already rushing to exit amid the bleak outlook for the country's economy, said senior fellow Jeremy Mark.
With little reason to re-enter, China will become the focus of investors looking for quick profits rather than stable growth.
“Investing in China will likely become the domain of foreign bargain hunters and hedge funds, some of which are already actively trading in the market,” Mark wrote, later adding: “The remaining fund managers could end up contributing to the volatile swings.” are everyday life in China’s markets.”
Beijing has responded to the financial crisis in recent weeks, enacting a series of measures to curb the sharp decline. These include government-backed purchases as well as limited access to offshore markets and restrictions on short selling.
Although that flurry of efforts has sparked a rally in Chinese indexes this week, a more powerful recovery will depend on Beijing's handling of major crises, Mark noted.
China's real estate market is the biggest concern, considering that this sector accounts for around a quarter of the country's GDP. Once a fast-growing industry, its reliance on high debt has led to a massive wave of defaults that have forced real estate giants into liquidation.
Foreign investors have become disillusioned with Beijing's slow response, while the government's crackdown on the tech sector in 2020 provided further incentive to exit Chinese markets, Marks noted.
The stock exodus was largely led by passive funds and long-term growth investors. Net foreign inflows reached just $6.1 billion last year, the lowest level since 2017.
It had a direct impact on China's startup scene as the country's IPO market dried up as new companies sought cash.
“Even if the economy and property market bottom out in 2024, there are worrying signals about the government’s intentions for equity investors. In recent months, there have been various statements to financial markets that suggest less tolerance for business as usual,” Marks said.
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