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Chinese stocks dive on economic and geopolitical fears

Chinese stocks dive

Chinese stocks experienced a significant decline after traders returned from a long weekend, influenced by a series of negative developments that dampened market sentiment. Investors who had been away for the Dragon Boat Festival holiday were greeted with a sharp downturn, highlighting the fragile state of confidence in the market. This decline was a stark reminder of the challenges facing China’s economy as it navigates a complex recovery phase.

The sentiment in the market was already precarious, and the confluence of various negative factors exacerbated the situation, leading to a substantial sell-off. Market participants had hoped for a period of stability and potential growth post-holiday, but these hopes were dashed as the trading week began on a sour note.

The CSI 300 Index, which tracks mainland shares, fell by 0.9%, reaching its lowest point in over six weeks following the reopening of markets after the Dragon Boat Festival holiday. The CSI 300 Index is a significant benchmark, and its decline to this level indicated broader market concerns. Meanwhile, a gauge of Hong Kong-listed Chinese shares emerged as one of the largest decliners in Asia, dropping as much as 2% before recovering some of the losses. This steep decline in Hong Kong-listed shares reflected both regional and global apprehensions about the trajectory of China’s economic recovery. The performance of these indices is closely watched by international investors, and their poor performance can influence global market sentiments, leading to a ripple effect across other major markets.

The market downturn was attributed to weak travel spending and renewed concerns over the property sector, which heightened worries about the sustainability of China’s economic recovery. During the holiday, travel spending failed to meet expectations, signaling weaker consumer confidence and reduced disposable income among the populace. This was a critical indicator because strong domestic consumption is vital for economic recovery.

Additionally, geopolitical risks negatively impacted shares of electric vehicle manufacturers, as traders awaited the European Commission's decision on provisional duties, expected later in the week. This anticipation created an atmosphere of uncertainty, as the imposition of new duties could disrupt supply chains and market dynamics, particularly for the burgeoning electric vehicle industry, which has been a key area of growth and innovation for China.

“The recent weekend holiday didn’t see as strong consumption as the previous May golden week, and weekly property sales are weak though that’s also volatile,” stated Xin-Yao Ng, director of investment at abrdn. He added that these issues followed weak macroeconomic readings earlier, such as the NBS Purchasing Managers' Index (PMI) and import data. The weaker consumption during the holiday period compared to the robust spending seen during the May golden week highlighted underlying economic vulnerabilities.

Furthermore, the weak property sales figures pointed to a lack of confidence in the real estate market, a sector that has traditionally been a significant driver of economic growth in China. The poor performance of these macroeconomic indicators underscored the broader challenges facing the Chinese economy.

Although domestic tourism spending increased by 8.1% year-on-year during the extended weekend, this growth indicated a weakening momentum compared to other recent short holidays, according to Citigroup Inc. Analysts Brian Gong and Alicia Yap noted that average spending per traveler remained subdued, which negatively impacted travel-related stocks, including Changbai Mountain Tourism Co. The modest increase in tourism spending was insufficient to offset the broader negative trends. Travel-related stocks, which had been expected to benefit from the holiday period, instead saw declines due to lower-than-anticipated spending. This trend suggested that while people were traveling, they were spending less, reflecting economic caution among consumers.

Efforts by authorities to stabilize the property market did not succeed in boosting sentiment, as Dexin China Holdings Co. became the latest developer to face liquidation. The collapse of Dexin China Holdings highlighted the ongoing troubles in the property sector, which has been plagued by overleveraging and regulatory challenges. Developer stocks entered a technical bear market last week amid skepticism regarding the central government’s broad support package. The government's attempts to stabilize the sector through various measures have thus far failed to reassure investors, leading to continued pessimism about the prospects for recovery in this critical area of the economy.

“The overall weak market due to lowered hope of a rate cut from US this year — combined with very fragile investors’ confidence on the property market — contributed to property stocks’ declines today,” said Raymond Cheng, head of China property research at CGS International Securities Hong Kong. He noted that some investors wanted to see tangible evidence of recovery before investing in the sector. The lowered expectations for a US rate cut added to the global economic uncertainties, affecting investor sentiment worldwide. In China, the fragile confidence in the property market meant that even minor negative news could lead to significant sell-offs, as investors remained cautious and risk-averse.

China’s fledgling stock rally is losing momentum, with a gauge of companies listed on the Shanghai stock exchange nearing a key psychological threshold, threatening to fall below it for the first time since late March on a closing basis. This potential breach of a critical support level is seen as a warning sign by market analysts, indicating possible further declines if investor sentiment does not improve.

The stock rally that had shown promise earlier in the year is now at risk of reversing, as underlying economic issues come to the forefront. The performance of the Shanghai stock exchange is a barometer for the overall health of the Chinese economy, and its decline raises concerns about the country's near-term economic prospects.

Traders are anticipating more decisive measures to support the market after recent efforts did not meet expectations. They are also focusing on the upcoming third plenum, a closed-door meeting in July, for signs of potential policy changes and future initiatives to stabilize the slowing economy. The third plenum is seen as a critical event where significant policy decisions could be made, potentially providing the much-needed stimulus to rejuvenate the market.

Investors are hoping that the government will unveil new measures to address the economic slowdown and restore confidence in the markets. The anticipation of this meeting adds a layer of speculation and hope that future policy announcements will provide clear direction and support for the economy. Source: Bloomberg.

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