China Stocks Slump to 5-Year Low as 2024 Starts on a Dismal Note

(Bloomberg) -- Investors betting on a revival in Chinese stocks in the new year are seeing their resolve tested as the market has deepened its slump in the first few days of trading.

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Persistent concerns over the nation’s economic recovery and policy uncertainty have pushed an onshore equity benchmark to its lowest in nearly five years. Foreign investors were back selling in earnest Monday, offloading the equivalent of $600 million of mainland shares.

Negative news has just kept hitting. Manufacturing data surprised to the downside at the turn of the year, while trade tensions ratcheted up with Europe and the bankruptcy of shadow bank Zhongzhi Enterprise Group highlighted brewing financial risks. A report Monday that the securities regulator has lifted a ban on net selling for local mutual funds also hurt sentiment.

There hasn’t been “any major new policy announcement coming out of the broader China complex,” Jason Lui, head of APAC equity derivatives strategy at BNP Paribas, said Monday at a briefing. While valuations have become quite depressed, “we don’t necessarily have the same kind of growth trajectory to just reattract flows right away,” he added.

The CSI 300 benchmark fell 1.3% Monday to close at its lowest since February 2019. The gauge has declined in every session this year to shed over 4%, becoming one of the world’s worst-performing major equity indexes. The Hang Seng China Enterprises Index slid more than 2% to close at the lowest since November 2022, with tech stocks leading the losses.

In 2023, the CSI 300 Index ended the year with an unprecedented third straight annual loss after foreign purchases via trading links with Hong Kong shrank to the smallest on record.

Proponents of Chinese stocks say valuations have become too cheap to ignore, and cite the potential for huge gains should positive triggers kick in. The CSI 300 trades at 10 times forward earnings estimates, below the five-year average and trailing the MSCI Asia Pacific gauge’s reading of 13.

“The worst is over” and we are “relatively optimistic” about China stocks in 2024, Meng Lei, China equity strategist at UBS Securities, said Monday at a media briefing in Shanghai, citing earnings improvement, less drag from the property sector and more fiscal support.

The upcoming raft of monthly data, however, is unlikely to change the weak narrative on China. Consumer prices likely remained in deflation in December while credit expansion slowed from the previous month, according to estimates compiled by Bloomberg.

--With assistance from Sangmi Cha.