The Chinese equity market is experiencing a deepening selloff, with traders weighing a barrage of economic and geopolitical risks, and global funds accelerating their exodus. The MSCI China Index is heading for a sixth day of declines, which will be the longest losing run since October, having lost as much as 2% on Tuesday. Foreign investors have been net sellers of onshore China shares for a third straight session, while bond yields have dropped.
Geopolitical tensions are cited as a key deterrent, even as the US plans to limit investments in key parts of China's economy were of little surprise. While a consumption-driven recovery is taking hold, with the economy growing at the fastest pace in a year in the first quarter, and retail sales soaring last month, the nation's top leaders have highlighted risks to the rebound. "Investors seem to be having concerns about the sustainability of the recovery in China and the heightening of geopolitical tensions," said Redmond Wong, strategist at Saxo Capital Markets HK Ltd.
The Hang Seng China Enterprises Index of Chinese stocks listed in Hong Kong has lost more than 5% this month, making it the second-worst performer among more than 90 global equity gauges tracked by Bloomberg. Overseas funds have sold a net $754 million worth of onshore China stocks via trading links with Hong Kong on Tuesday, adding to an outflow of about $1.7 billion in the previous two sessions.
Investors have sought refuge in sovereign bonds, with the 10-year yield falling for three days on the interbank market to Monday. However, the market is facing "a raft of negative geopolitical noises with little positive catalysts," including Biden's executive order to restrict investments and comments by the Chinese ambassador in France about ex-Soviet states, said Vey-Sern Ling, managing director at Union Bancaire Privee.
The April meeting of the Communist Party's Politburo, the nation's top decision-making body, is expected to turn its policy focus to boosting business confidence and increasing jobs without adding extra stimulus. The People's Bank of China has already signaled it will begin dialing back pandemic stimulus.
Bank of America Corp. strategists including Winnie Wu wrote in a note that "European investors that we met last week are frustrated with the sluggish performance of the China markets, similar to HK/China investors." However, given geopolitical tensions, people are unsure about the long term and are reluctant to "buy and wait," they added. Investors are also questioning the accuracy of macro data as corporate earnings and guidance remain soft.
Tech and pharma stocks were the biggest losers on the HSCEI gauge on Tuesday, with the Hang Seng Tech Index sliding more than 3%.Overall, the selloff in Chinese equities is showing no signs of abating, as traders and investors weigh the various economic and geopolitical risks. While there are some positive indicators, such as the consumption-driven recovery, the market is still facing significant headwinds. As geopolitical tensions continue to simmer, and investors remain cautious about the accuracy of macro data and corporate earnings, it may take some time for the Chinese equity market to recover its lost ground.
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