Concerns over economic slowdown and profitability have overshadowed policy optimism, leading to foreign investors fleeing the Chinese stock market once again, halting the four-month streak of capital inflows. As of Wednesday, June 26, global funds sold a total of 49.4 billion Chinese yuan (6.8 billion US dollars) of domestic stocks through the Hong Kong Stock Exchange in June.
According to Bloomberg on Thursday, June 27, the outflow of funds has caused a decline in the stock market with the MSCI China Index entering a correction phase on Thursday. The domestic stock Shanghai Shenzhen 300 Index has also dropped over 6% since its mid-May peak.
The recent downward trend contrasts with the situation earlier this year when bets were placed on Beijing taking bigger measures to support the economy, driving the Chinese stock market upwards. Although some investors still hold hope for new momentum from the Third Plenum, Beijing would have to pay a high price to impress investors and revive market sentiment.
Xin-Yao Ng, the Director of Asian Stock Investments at abrdn, stated, “Policy support, especially for the real estate industry and the economy, sparked some enthusiasm leading to a noticeable rebound. But after the initial excitement, I feel investors have begun to carefully study these factors and realize that things are far from being as simple as they imagined.”
Since the lifting of lockdowns due to the pandemic in China, the unbalanced economic recovery, ballooning local government debt, and the ongoing slump in the real estate market have scared off both domestic and foreign investors, leading to sell-offs. The Shanghai Shenzhen 300 Index tracking the largest listed companies in Shanghai and Shenzhen has dropped by around 38% since reaching its peak in February 2021, while the Hang Seng Index plummeted by 42% during the same period.
Ray Dalio, the founder of Bridgewater Associates, has shifted from optimism to pessimism, recently stating in an interview with Nikkei Asia that real estate debt issues are severely dragging down the Chinese economy.
He pointed out that since the economic boom of the 1980s in China, debt has been expanding, and wealth disparity has been widening. Additionally, the decrease in population due to the one-child policy has also led to an increase in national debt.
Dalio believes that China now needs debt restructuring, a process that will be “painful both politically and economically,” and extremely challenging.
As of March, Bridgewater Associates, the world’s largest hedge fund, managed assets worth over $171 billion. However, in recent months, Bridgewater Fund has also been selling Chinese stocks, joining the global trend of investors retreating. In the first three months of this year, the company reduced holdings in nearly all China-based stocks listed in the US, including Pinduoduo, Yum China, and Trip.com, with reductions as high as 78%.
According to The Washington Post, by the end of the first quarter of this year, the total value of Chinese stocks held by Bridgewater Associates had plummeted to $313 million, a sharp 86% drop from the recent high of about $2.2 billion at the beginning of 2022.