After last month’s hopes of economic stimulus, investors are realizing that actual government easing policies may be limited and slow
The CSI 300 index, which tracks large-capitalization stocks listed in Shanghai and Shenzhen, has lost 5.7% this week, bringing it to the lowest level in two years. The rebound in offshore-listed Chinese stocks—triggered by supportive messages from Beijing in March—has also lost steam. The Hang Seng Index has already given up more than half of its gains since the mid-March low.
The Chinese yuan has also depreciated sharply, losing around 2.8% against the dollar in the past week. China’s central bank tried to stem the decline on Monday, saying it would cut the amount of foreign exchange banks must hold as reserves. Rising US rates have narrowed the yield gap with China, giving capital owners a reason to pull out.
The market weakness extends beyond China. Prices of industrial commodities like iron ore and copper have fallen as economists have cut growth forecasts for Chinese output. Expectations for corporate profits are similarly coming down. In the past couple of months, analysts have lowered 2022 earnings estimates for around two-thirds of companies in the MSCI China index by benchmark weight, according to Morgan Stanley.
Housing sales in China remain in the doldrums even though many local governments have already rolled out easing policies. While infrastructure investment has picked up in the first quarter, it may need to go much higher to offset all the challenges. Natixis estimated that infrastructure investment needs to grow 18% this year to meet the 5.5% growth target. The sluggish housing market could pose challenges to funding those projects given the importance of land sales as a source of revenue for local governments. Covid restrictions may also put physical constraints on how fast construction can increase.
Investors are learning the difference between helpful rhetoric from the government and the kind of policy measures that might actually boost China’s economy amid today’s supply-side challenges.
Write to Jacky Wong at [email protected]
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