A gauge of Chinese shares traded in Hong Kong inched closer to a bear market as a wobbling economic recovery, intensifying geopolitical tensions and a weaker yuan kept investors away.
The Hang Seng China Enterprises Index slumped 1.3% on Monday, taking its losses from a Jan. 27 peak to a whisker away from reaching 20%. Meituan was the biggest drag amid concerns that increased competition will dent the e-commerce firm’s profitability.
The grim milestone looms as China’s post-Covid recovery loses momentum and earnings fall short of high expectations. Investors say the market lacks catalysts for a rebound as growth expectations are being pared back, while frictions with the US persist on issues from technology to Taiwan. The HSCEI gauge has erased about half of the gains seen during a three-month reopening rally through January.
“China’s domestic recovery just hasn’t been as strong as expected, and not enough to offset worries of a global slowdown,” said Marvin Chen, an analyst with Bloomberg Intelligence. “Markets may be getting fatigued waiting on catalysts such as monetary easing or thawing in US tensions, and are looking elsewhere for growth.”
Recent data suggest gross domestic product growth this year will be closer to the government’s target of about 5%, contrary to expectations of a large overshoot formed earlier in the year. Profits at industrial firms in China kept falling in the first four months of the year, underlining cooling demand and deepening factory-gate deflation in the world’s second-largest economy.
There’s little relief on the horizon, with data due this week expected to show another monthly contraction in China’s manufacturing activity and slower expansion in services. Down more than 6% this year, the HSCEI gauge is among the worst performers in Asia.
China’s onshore CSI 300 Index slid 0.4% on Monday, after having erased all its gains for 2023 last week amid a weaker yuan and developers’ debt woes. Meanwhile, the MSCI Asia Pacific Index of regional stocks climbed as sentiment improved following a deal between President Joe Biden and House Speaker Kevin McCarthy on the US debt ceiling.
As losses deepen, Chinese equities are losing their bullish strategist calls. Citigroup Inc.’s global allocation team cut its overweight rating on China to neutral on Friday, while Jefferies Financial Group Inc. strategist Christopher Wood reduced his overweight allocation on the market for the second time in under two weeks in the Asia Pacific ex-Japan model portfolio.
The turnover for mainland stocks has remained below 1 trillion yuan ($141 billion) for more than two weeks, highlighting a lack of enthusiasm as investors stay on the sidelines. Foreigners increased holdings of Chinese stocks via trading links with Hong Kong on Monday, after shedding more than $3 billion through Tuesday to Thursday last week. Hong Kong markets were closed Friday for a holiday.
The Hang Seng Tech Index closed down 1.2% on Monday as Meituan tumbled 8.1%, more than offsetting a rally in NetEase Inc. and Baidu Inc.
“Investors will only return in a meaningful way when concerns about geopolitics and broader economic recovery are allayed,” said Vey-Sern Ling, managing director at Union Bancaire Privee.
