Market: Will the year of the dragon bring luck to the stock market in China?

(BFM Bourse) – The Lunar New Year takes place this Saturday, while Chinese stocks have been suffering enormously for many months. The bad trend risks continuing even if some financial intermediaries want to be optimistic.

Popular belief has it that the Year of the Dragon, which begins this Saturday in China, is a good omen. The dragon “is recognized as one of the most auspicious signs for luck, strength and health”, underlines asset manager Franklin Templeton. “People born under this sign are considered strong, generous and full of vitality,” the company continues.

To say that Chinese actions lack vitality and strength is an understatement. In 2023, the CSI 300, which brings together the 300 largest capitalizations on the Shenzhen and Shanghai stock exchanges, lost more than 11%, recording a third consecutive year of decline. The start of 2024 is hardly more exciting, with the index currently losing almost 2%

since January 1st. Added to the slump in mainland Chinese stocks is that of the Hong Kong market, with the Hang Seng dropping 6.9% since the start of the year and nearly 27% over one year.

The factors explaining the agony of the stock markets turn out to be multiple. Growth is slowing down significantly in the country. Last year, Beijing managed to meet its 5% target, with an increase of 5.2% in GDP according to official data. This, however, remains the lowest progression since 1990 (3.9%) excluding the Covid-19 period. “China is undoubtedly facing a growth challenge,” judges Allianz Global Investors.

Real estate and demographics at half mast

“China has achieved its growth target of 5%, but the country’s two main structural problems, real estate and demographics (the country saw its number of inhabitants fall in 2022 and 2023, Editor’s note), weigh on “long-term growth and the absence of an announcement of massive public support as in the past is a deafening silence for the markets”, explains OFI Asset Management.

“The Chinese government has sought the right balance between fiscal stimulus to avoid real estate defaults and at the same time maintaining curbs on speculation in the sector,” adds the management company.

The country’s major real estate developers, Country Garden and especially Evergrande, continue to worry investors. A Hong Kong court last month ordered the liquidation of Evergrande. Without us really understanding what this decision means for this company with liabilities of more than 300 billion dollars, the Hong Kong justice system having limited powers vis-à-vis companies in mainland China, explains Bloomberg.

More broadly, real estate, which constitutes an important source of wealth for Chinese households, is struggling. In December, prices of new homes fell further and even accelerated their decline, for the sixth consecutive month. But real estate represented up to 29% of China’s gross domestic product at its peak. “It is clear that new growth engines must replace this sector in order to achieve a meaningful recovery and support long-term growth in China,” says Franklin Templeton.

Foreign investors have fled

Furthermore, Chinese markets would not be Chinese markets without political and geopolitical risks. Tensions with the United States, particularly with technological sovereignty at stake, persist. Above all, Beijing demonstrates disconcerting political interventionism, regularly mistreating entire sectors on the stock market. This has been the case with large tech groups, those specializing in educational assistance, or, more recently, video game companies.

Foreign investors have consequently fled Chinese stocks in the second part of 2023. According to the Financial Times, between August and the end of last December, nearly 90% of the $33 billion in net foreign investments previously collected in these stocks melted away. .

Given their plunge, can Chinese stocks rebound in this year of the dragon? “Historically, this year is good for stock markets. Of the four ‘dragon years’ in recent history (1976, 1988, 2000 and 2012), Hong Kong’s Hang Seng Index rose in three between them, with an average return of 17%”, says the broker Etoro.

For the moment, caution remains in order. The latest global survey of fund managers by Bank of America showed that distrust was still high. According to this survey, playing the decline in Chinese stocks was the second most consensual bet among managers, behind buying the shares of the “magnificent seven” of Wall Street (Nvidia, Amazon, Meta, Apple, Tesla, Microsoft, Alphabet) .

BNP Paribas Asset Management remains cautious. “Our ‘Multi Asset’ team does not really want to take advantage of the recent downward movement in Chinese stocks,” explained the BNP Paribas subsidiary at the beginning of the month.

Chinese stocks are looking cheap today. OFI AM notes that the MSCI China index is currently paying less than ten times expected profits over twelve months, compared to a long-term average of around 15. “The additional downside risk now seems quite limited to us, but a catalyst is needed so that this discount is absorbed”, adds OFI AM.

According to the financial intermediary, this trigger could come from the government via a massive support plan.

Bloomberg also reported that Chinese President Xi Jinping met with regulators this week to discuss the rout of local stock markets. For now, this meeting has only resulted in… the replacement of the president of the stock market watchdog, the CSRC (China Securities Regulator Commission).

The government action in question

Optimistic on Chinese stocks, the investment company Robeco wrote in early January that China “needs budgetary firepower for a recovery in its stock markets”. “The key lies in a major budgetary effort to compensate for the negative wealth effect of the real estate market,” continued Robeco.

It remains to be seen whether the hypothetical measures that the Chinese authorities will take will have a real impact. Or if it will be a simple sticking plaster.

“Despite recent measures taken by the Chinese authorities to support growth and markets – including a further reduction in bank reserve requirements – we maintain our cautious strategic view on Chinese financial assets,” stressed last week Homin Lee, strategist at Lombard Odier.

“Despite Beijing’s repeated attempts to stimulate local markets, investor pessimism remains omnipresent,” adds the expert. And to warn: “we believe that this is unlikely to change in the near future, even if intermittent market ‘rescues’ produce short-term rebounds. (…) A lasting recovery would require a reflation program (a policy which consists of stimulating prices, editor’s note) credible and structural reforms, which political decision-makers do not seem able to do.