The Chinese and Hong Kong stock markets have been in a bear market for the past 3 years, with three major indices the SSE, HSI and CSI 300 declining between 13% and 37% as compared to 3 years ago.
Here we share the current state of play and also some of the issues that have caused the bear market for the last three years as well, as considerations for the investor and the outlook for 2024.
Regulatory crackdown
China cracked down on the tech industry affecting companies such as Alibaba, Tencent and Meituan, the healthcare platform sector which impacted names such as JD Health, Ping An Healthcare and AliHealth, and the online education sector which wiped out names such as TAL Education and New Oriental Education.
Companies were fined for their past missteps and new regulations were introduced. Finally, it seems like the worst is over. All major relevant parties have been fined, paid their dues, and implemented new processes to adhere to the new regulations.
The IPO market all but dried up at the onset of the regulatory crackdown. Now, companies such as Alibaba are starting to look towards the capital markets again to raise funds, with initial plans to list some of its units via an IPO and other options.
Due to the severity of the additional regulatory compliance, analysts and investors remain unsure if many of these companies can focus on growth and regain their growth trajectory.
Property Market debt crisis
The debt crisis surrounding the major Chinese property developer doesn’t seem to be able to ever get out of the dumps towards a resolution.
Despite a raft of supportive policies in recent months, home sales are showing few signs of improvement. Developers, said that could make debt restructuring terms much worse than expected earlier.
Chinese property developers have been moving towards restructuring billions of dollars of debt, China’s Evergrande Group, who is the face of the crisis, is facing an impending court hearing focused on a potential liquidation while trying to finalise a revamped offshore debt restructuring plan.
The Chinese government has attempted to maintain liquidity and facilitate options but with lacklustre economic growth, consumer demand for new properties will continue to be tepid.
Lacklustre economic growth
Although China headline GDP of 5% is faring comparably better than the rest of the world, much of their growth can be attributed to fiscal spend on infrastructure
China is looking to increase fiscal spending to stimulate its economy. The consequence of a higher fiscal spend is a budget deficit/smaller budget surplus. This increases the debt leverage ratios and leads to issues such as a credit rating downgrade.
Credit rating downgrade
On 5 Dec, Moody’s downgraded the outlook on China’s A1 debt rating from “stable” to “negative”.
Moody’s also cut the outlook for eight Chinese banks and a few Chinese state owned companies to negative from stable.
Companies such as Alibaba and Tencent also saw their outlook downgraded due to their exposure to the country.
Hong Kong and Macau were also similarly affected due to their relationship to China.
Moody’s cited “increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector.”
China likely needs to provide more support for debt-laden local governments and state firms, which pose “broad downside risks to China’s fiscal, economic and institutional strength,” it added.
Historically, about one-third of issuers have been downgraded within 18 months of the assignment of a negative rating outlook.
Generally, companies cannot have a credit rating that is higher than the country in which they are based.
China is not the only country that has seen a derating of its credit quality. Less than a month ago, Moody’s did the same to the US, downgrading the outlook to the US’ last remaining triple-A grade from a credit rating agency.
Political dynamics
US and China have not been on good terms, engaging in tit-for-tat politics. Escalating tariffs have been enacted on each other leading to a trade war. Tensions are also high over sanctions from both parties and export controls of advanced chips to China.
Both governments have attempted to repair the relationship by starting a conversation at various levels of governments which culminated in Presidents Xi and Biden meeting in Nov 2023 at the APEC summit where both had a long, fruitful and carefully planned discussion.
Expectations were for the meeting to end the negative relationship spiral between the two countries and avert further crisis. However, at the news conferences following the meeting, Biden called Xi a dictator. While there was no retaliation or remarks from the Chinese, it is safe to say that this did not help in warming ties between the two countries. This continues to affect investor’s confidence and put foreign investors off returning to China.
Investor psyche
The Chinese and Hong Kong stock markets have seen several dead cat bounces, rebounding into bull markets before falling into bear markets several times. As such, we think that most investors who have waited and planned to enter these markets have likely already done so.
Anyone else who has not invested is probably not interest in the Chinese markets due to the perceived risks involved.
Foreign funds have also substantially reduced their exposure to China and local buyers entering have not been adequate to stem the deficit.
Hence we think there are probably two main types of investors left in the China/Hong Kong stock market: investors who entered earlier and have given up, and persistent investors.
Persistent investors likely continue to buy into the Chinese markets on a periodic basis, awaiting a potential recovery, while investors who have given up likely are standing by without taking any buy/sell action. Some of these investors may cut their losses and sell on a bounce while others are hoping to gain some confidence to average down if the market recovers.
Outlook for 2024
Many believe that the outlook for 2024 is uncertain. We have listed several issues such as the property market debt crisis, the lack of economic growth, the recent credit rating downgrade.
Since the beginning of 2023, China’s macroeconomy has continued to recover despite facing a complex and severe international situation and against the backdrop of unstable global economic recovery and weakening momentum.
Economists forecast for China’s 2023 GDP to be 5% and its 2024 and 2025 GDP to be around 4%. This is higher than the global economy’s growth which is projected to fall to 3.0% in both 2023 and 2024.
Some say this is a sweet spot for the Chinese market, with many positive actions being taken.
The government is stepping in with both monetary and fiscal policies and at the same time trying to regain investors confidence on the international scene by stabilising China’s position as one of the twin economic powers alongside the US.
This gives investors hope that the worst is over, and a recovery will eventually come, or will it not?