In an unprecedented move, foreign investors have unloaded more Chinese stocks in August than in any other month since records began. Is it just a minor blip or an indication of a deeper underlying issue? What’s causing the clouds over China’s financial arena?
Foreign Capital Retreat Amid China’s Economic Uncertainties.
August has seen a net sale of $9.8 billion A-shares by foreign investors via the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects. This marked the largest monthly sale since the inception of these stock connects in November 2014. Since August, the CSI 300 Index, which tracks top firms in Shanghai and Shenzhen, has plummeted by more than 7%.
Unlike most of the world experiencing a robust bounce-back post-pandemic, China’s journey seems rocky. Stagnant growth, deflating prices, a burst real estate bubble, and a surging unemployment rate among the youth paint a bleak picture. Recent economic data from China, worrisomely below economist predictions, have sent chills down the spine of global investors.
In response to the economic downturn, China’s central bank slashed primary interest rates to a new low. Yet, critics argue, it might not be bold enough. A gloomier scene unfolds as official data reveals house prices in 49 out of 70 major cities have started to drop. Furthermore, the Communist Party’s recent meetings didn’t echo their longtime slogan: “Houses are for living, not for speculation.” The omission has sparked speculation about a shift in the official stance towards the real estate industry.
In addition, the government’s decision to momentarily withhold youth unemployment data – recently peaking at a record 21.3% – underscores the magnitude of the crisis.
Stabilizing the Turmoil: Is it Working?
In an effort to assuage the market and reduce anxiety, the China Securities Regulatory Commission (CSRC) in August mulled over extending trading hours for A-shares. Additionally, mutual fund managers were directed to intensify buying their equity products. Top Chinese asset management firms announced plans to invest CNY 50 million in their funds. Yet, the desired market uplift hasn’t materialized.
China’s Ministry of Finance and State Taxation Administration announced a halving stamp duty on securities transactions starting from August 28. This means the stamp duty for A-share transactions would drop from 0.1% to 0.05%.
Interestingly, this is not the first time China has tinkered with the stamp duty to regulate the stock market’s temperature. China uses stamp duty as a stock market tool; in 2007, they raised it to 0.3% amid a surge of new investors to cool the market. During the 2008 financial crisis, they lowered it to 0.1% to stimulate growth.
Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset management company, had already sounded alarms in June. He hinted at a global reassessment of the extent of investment in China, with a potential pivot towards the Japanese stock market. Now, with China’s escalating real estate concerns, the trend of foreign investors offloading Chinese stocks seems increasingly evident.
China stands at a crossroads, grappling with a real estate dilemma, dwindling domestic consumption, and a climbing unemployment rate, especially among the youth. The government’s call this month to China’s pension funds and large state-owned banks to buy shares and their encouragement for companies to buy back stocks highlights the urgency.
Amid the turmoil and maneuvers, one can’t help but wonder, will these measures steer China’s financial ship through the storm?