Image Source: Bloomberg

Chinese equities have surrendered all their gains since the nation emerged from stringent zero-COVID restrictions, signaling lingering investor anxiety about dimming economic prospects.

The benchmark CSI 300 index sank 0.7% on Friday to finish trading at 3,510, notching a 16% drop from its late January peak. During the session, the index briefly dipped below 3,502, plunging even lower than last October when Chinese stocks bottomed out just before the country began easing pandemic curbs.

The renewed selling pressure deflated optimism over China’s reopening, showing traders remain wary of deep-rooted drags on growth. Worries are mounting over the debt crisis in China’s property sector, slumping consumer demand, disruptive U.S.-China tensions and other hurdles as the country heads for its slowest expansion in decades.

Stocks Sink Despite Aggressive Stimulus Efforts

The losses occurred despite aggressive stimulus efforts by Chinese authorities aimed at reviving markets and the broader economy. Regulators pledged tighter oversight of speculative trading activities while funneling hundreds of billions of dollars into the banking system through liquidity injections.

But such interventions failed to restore confidence. Heavy foreign selling exacerbated the downturn as international investors yanked money out of Chinese equities. Overseas traders offloaded a net $3.3 billion of onshore stocks last week, the most since August, Bloomberg data showed. August saw a record $12.3 billion exodus.

The capital flight signals global investors are increasingly bearish on China’s economic trajectory despite hopes that ending COVID-19 restrictions would catalyze a robust rebound. Instead, headwinds like the real estate crisis, weak consumer spending and global trade tensions have dashed those expectations.

China’s growth is widely projected to slow to just 3% this year from 8% in 2021 — marking one of its weakest expansions in 40 years outside of crisis periods.

Economic Gloom Deepens Despite Reopening

When China finally ditched its stringent zero-COVID regime around October 2022 after nearly three years, many predicted pent-up demand from consumers would spark a revival. The country had suffered severe disruptions under the policy, with harsh lockdowns in cities like Shanghai and mobility restrictions that kept shoppers home.

But China’s consumer economy has struggled to gain traction even without COVID-19 curbs. Retail sales plunged in July and again in August, underlining tepid demand as households grapple with job uncertainty and a weakening property sector.

Real estate — which drives up to 30% of China’s GDP — has verged on collapse amid mounting developer debts. Troubled giant China Evergrande defaulted last year, sparking contagion across the industry. A resulting slump in home prices and construction has sapped investor confidence.

Trade tensions with the U.S. and allies like Japan have also escalated, threatening to derail exports. Western governments are increasingly wary of growing Chinese high-tech capabilities and global clout. Disputes over semiconductors, 5G infrastructure and other areas risk dividing the global economy into competing spheres of influence.

Meanwhile, the Ukraine conflict and resulting geopolitical realignments have raised uncertainties. Russia’s isolation could benefit China strategically and economically in some regards, even as the war disrupts global energy and food flows. But managing the complex emerge reality remains a fraught challenge for Beijing.

Stimulus Steps Fail to Restore Investor Morale

To stabilize markets and stimulate the economy, Beijing has unleashed a wave of monetary stimulus while also cracking down on speculative trading. But the measures have so far failed to boost investor sentiment or reverse the sense of gloom hanging over China’s near-term prospects.

On Friday, the People’s Bank of China pumped around $113 billion into the banking system through short-term loans. It had already injected about $85 billion through similar policy loans and $107 billion via medium-term loans earlier in the week.

Regulatory bodies have also vowed harsher oversight of arbitrage trading and speculation. Starting October 30th, hedge funds must hold 100% of the value of a trade in their accounts. Other short sellers face an 80% margin deposit requirement.

The moves aim to rein in destabilizing forces blamed for exacerbating market swings. But fundamentally, policymakers have scant options for alleviating the deep property sector woes or stimulating weakened consumer spending in the near-term.

Ominous Warnings for China’s Economic Future

While authorities scramble to shore up confidence, analysts warn China confronts serious financial perils from its debt-ridden property sector and slowing growth trajectory.

Some have even predicted a looming financial crisis as defaults spread across the real estate industry. “China is having its ‘Minsky moment’ right now,” said veteran emerging markets investor Ruchir Sharma, referring to meltdowns triggered by debt. “Real estate was the biggest bubble, and it’s bursting right now.”

Others forecast prolonged Japanese-style stagnation as the country struggles to transition its investment and export-led economy towards domestic consumption. Former Morgan Stanley Asia chair Stephen Roach sees a “lost decade” of growth for China as old engines of expansion sputter.

The downbeat prognosis comes as President Xi Jinping entrenches his power, clearing the way to pursue more state-driven economic policies prioritizing self-sufficiency and national security. Investors fear such a strategic realignment by China could accelerate decoupling from Western economies and global markets.

Equity Slump Reflects Investor Unease Over Outlook

The renewed slump in Chinese equities underscores how investor unease over the country’s economic trajectory persists despite hopes reopening would spark a revival.

Instead, traders have fled stocks as risks multiply. The benchmark CSI 300 index has now erased all gains made since China ended zero-COVID mobility curbs around October 2022.

By falling below October lows, the index has now plunged further than during the worst of the pandemic lockdown months. That demonstrates how optimism over China rejoining the global economy has evaporated amid its deepening property sector woes and other drags on growth.

While Chinese policymakers have taken steps to stimulate markets and increase liquidity, their limited options for alleviating the housing crisis and weak demand leave little upside ahead. The country faces not only a slowdown but potential financial disruption if real estate stresses persist.

With traditional engines of growth like exports and construction also slowing, China’s stated annual GDP target of 5–5.5% looks increasingly implausible. That’s a problem for an economy accustomed to expansion rates double or triple that pace.

And globally, sentiment towards China has cooled as geopolitical tensions rise. Foreign investor outflows reflect growing wariness about the country’s economic governance, strategic direction and transparency in the Xi era.

With hazards accumulating and stimulus failing to revive confidence, Chinese stocks seem poised for an extended slump as the country grapples with an uncertain future.