China burned investors again in 2023 as concerns about the second-biggest economy continued. The Shanghai Composite index underperformed its global peers like the S&P 500 and Nasdaq 100 index.
It was trading at CNY 2,953 on Thursday, 12.95% below its highest point in 2023. In contrast, these key American indices jumped by more than 20% and are sitting at their highest level on record.
China A50 vs Shanghai Composite
China burns investors againThe Shanghai index also underperformed its Asian counterparts like the Nifty 50 and Nikkei 225. Like in the US, Indian and Japanese stocks surged to their all-time highs in 2023 as demand from local and international investors rose.
In addition to the Shanghai Index, the China A50 and Hang Seng indices also plunged in 2023. As I wrote this week, Hong Kong’s Hang Seng index has now plunged in the past four years straight.
Mainland indices returns were worse in dollar terms as the Chinese yuan retreated. The USD/CNY dropped by over 6% in 2023 as the US dollar rose. On a positive sign, the pair has now pulled back from its highest point during the year.
The Shanghai Composite and China A50 indices tumbled as foreign investors dumped their holdings. A new report by FT notes that over $33 billion of foreign capital that moved to China earlier this year has already left.
Many foreign investors rushed back to China earlier this year as hopes of a swift recovery rose. While the economy boomed in the first few months of the year, it slowed down dramatically as the hype died.
Real estate crisisThe situation worsened when Country Garden, one of the biggest real estate companies in the country imploded. It joined other highly leveraged companies like Evergrande and Sunac that have been on life support.
Beijing is working to solve this crisis. It has launched a multibillion-dollar program to encourage the construction of stalled projects. It is also encouraging banks to lend more money to the embattled industry. These moves have led some analysts like Kyle Bass to warn about the country’s banking sector.
🛑 China is experiencing a USD funding crisis 🛑 (similar to the rest of the emerging world). Xi was forced to visit the PBOC and SAFE for the FIRST TIME EVER yesterday. China’s banking system is in free fall and Xi 1/9 https://t.co/1yIpHJjQTa
— 🇺🇸 Kyle Bass 🇹🇼 (@Jkylebass) October 25, 2023Foreign investors are concerned about the ongoing tensions between China and the United States. This fear continued after Russia invaded Ukraine in 2022. As a result, foreign investors in Chinese stocks plunged to an eight low in 2023. They peaked at over $400 billion in 2021.
The Shanghai Composite and China A50 indices also crashed because of the divergence between the Fed and the PBoC. In the US, the Fed pushed interest rates to the highest level in over 22 years while the PBoC slashed them in its fight against deflation. As a result, most of the outflows went to safe short-term Treasuries in the US.
Therefore, China could see some inflows in 2024 as the Federal Reserve starts cutting interest rates. Some analysts also believe that Chinese stocks are significantly cheaper than their global peers.
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