Chinese Stock Market Going Backwards... 'Lone Slump' Despite Global Market Rally

Lowest Level in 1 Year and 2 Months Since October Last Year
Declining Factors: Real Estate Slump, Income Reduction, Regulations

Unlike the global stock markets that have been on a high-flying streak this year, the Chinese stock market is moving in the opposite direction. While global markets, centered on emerging economies, continue their rally, the Chinese stock market hit its lowest point in about 14 months even after the reopening.

The Shanghai Composite Index closed at 2,898.88 on the 26th, down 0.68% (19.93 points) from the previous trading day. This is the lowest level in 1 year and 2 months since October last year. The CSI300, a benchmark index for large-cap Chinese stocks, ended the day at 3,324.79, down 0.68% (22.66 points). The CSI300 is showing its lowest stock price trend since 2019.

This year, there were expectations that the Chinese stock market would benefit from the reopening (resumption of economic activities) after COVID-19. This was based on the belief that the abolition of the 'Zero COVID' policy would trigger a virtuous cycle in production, consumption, and investment sectors. However, Bloomberg reported that “China’s real estate slump, declining household incomes, and uncertain regulatory policies have acted as downward pressure factors on the stock market.”

Moreover, the high-intensity regulatory measures on online gaming announced by Chinese authorities on the 22nd led to further declines in the Chinese stock market. After the announcement, major Chinese gaming companies such as Tencent (-16%) and NetEase (-28%) experienced double-digit percentage drops in their stock prices. As the stock market plunge continued, Chinese authorities took steps to ease the situation by issuing 'domestic game service licenses' (naija panho) for 105 games on the 25th. This is the largest number of domestic licenses issued since July last year. However, investors still seem to view the Chinese stock market as uncertain.

While emerging market stocks have continued their upward rally this year, the Shanghai Composite Index has fallen about 6%. This marks the second consecutive year of decline. The CSI300 has maintained a downward trend for three consecutive years (2021: -5.2% → 2022: -22% → 2023: -14%). Hong Kong’s South China Morning Post (SCMP) reported that “the CSI300 index is recording unprecedented annual losses.”

Goldman Sachs’ forecast that the Chinese stock market would rise 15% this year has been completely off the mark. Goldman Sachs had initially expressed optimism that “the rebound of China, the world’s second-largest economy, would act as a wave lifting emerging markets, making this year a successful one globally for emerging markets.” However, contrary to Goldman Sachs’ prediction, shadows have fallen over the Chinese stock market while emerging market stocks have performed relatively well.

According to Bloomberg, the ‘iShares MSCI Emerging Markets ex China’ (EMXC), an exchange-traded fund (ETF) tracking emerging market indices excluding China, rose 16% this year. In contrast, the MSCI Emerging Markets benchmark index, which includes Chinese stocks, only increased by 4.4%. This is explained by the fact that China accounts for nearly 30% of the overall index.

Goldman Sachs analyst Kamakshya Trivedi commented on this year’s Chinese stock market trend, saying, “We have learned the lesson that the Chinese stock market and emerging market stocks should be viewed separately,” and “The early and aggressive interest rate hikes by emerging market central banks to prepare for the upcoming inflation shock have had a significant impact on the rise of emerging market stock prices.”