(Bloomberg) – Losses on Chinese assets are mounting again as Beijing’s modest stimulus measures discourage investors.
The Hang Seng China Enterprises Index of Hong Kong-listed Chinese companies plunged more than 6% in four sessions, marking its sharpest weekly decline since March. The CSI 300 index of mainland stocks fell 2.5% through Wednesday before markets closed for the holiday. The yuan also fell to its weakest level since November, and analysts expect further falls.
Gloom reigns after authorities have refrained from providing major policy support even as the economy has lost momentum. Beijing is making it clear that any easing will be targeted and measured, saying goodbye to the days of massive stimulus that have led to leveraged buying and inflated asset prices – a distortion the country’s leaders are keen not to repeat.
“That’s a mismatch of expectations in my opinion,” said Zhikai Chen, head of Asia and global emerging market equities at BNP Paribas Asset Management. “It’s a very awkward situation where positioning is low, valuation is undemanding, yet sentiment is very pessimistic.”
Analysis by Morgan Stanley’s quantitative team shows that active long-only managers continued to be net sellers of Chinese growth and technology stocks in May and June. Meanwhile, hedge funds started their bearish bets as the cohort’s outstanding short positions rose 32% in June, they found.
Of course, China has taken measures to boost its economy, including a series of interest rate cuts and expanded tax breaks for consumers who buy clean cars. Market reactions were muted as traders are skeptical that such measures will revitalize an economy weighed down by record debt, slowing global demand and weak business and consumer confidence shattered by years of unpredictable political shifts.
“It is significant that the market has not been able to stage a sustained recovery year-to-date despite monetary easing,” said Eli Lee, head of investment strategy at Bank of Singapore Ltd. “Policymakers’ gradual easing approach, as. They remain determined to contain the long-term build-up of debt in the economy and may not make the difference.”
That doesn’t mean the bulls are giving up. According to a June 19 note, strategists at Goldman Sachs Group Inc., including Kinger Lau, said a tactical trading window for Chinese stocks was “open again” amid cheap valuations. Strategists recommended buying monetary easing, artificial intelligence and SOEs themes. The MSCI China Index is trading at 10.1 times forward earnings, down from the five-year average of about 12.1.
“There’s a lot of negativity, but I think a lot of it is already embedded in price,” Ken Peng, head of Asia-Pacific investment strategy at Citi Global Wealth Investments, said in a news conference this week. “The prospect of better second-half growth is there, but it’s coming at a much slower pace.”
Expectations remain for some sort of stimulus, likely after the July Communist Party Politburo meeting to discuss economic policy. Some analysts say a weak yuan, currently tolerated by Beijing, could be a form of monetary easing to prop up export demand.
Until the next big stimulus, if any, traders will focus on the deteriorating outlook for China’s economy and corporate earnings. JPMorgan Chase & Co., UBS Group AG, Standard Chartered Plc and Citigroup Inc. recently cut their 2023 gross domestic product growth forecasts to 5.5% or less as official figures for exports and credit expansion on retail sales fell short of expectations .
“The flows, the sentiment, the margin trades, they’re all at a pretty bearish level,” Bank of America Corp. strategist Winnie Wu said on Bloomberg TV on Friday. Given the ample liquidity, “there is theoretically a good basis for a trading bounce, but it could just be a trading bounce if we don’t get fundamental support,” she added.
– With assists from Ishika Mookerjee, Chester Yung and Nurin Sofia.
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