China’s equity market has been hit hard by a series of regulatory actions that have targeted various sectors, from technology to education to property. These measures have dampened investor sentiment and reduced the appetite for new stock funds. According to data from the Asset Management Association of China, the net inflows into new stock funds in the third quarter of 2023 were only 12.9 billion yuan ($1.9 billion), the lowest level since the fourth quarter of 2011. This is a sharp contrast to the record high of 1.2 trillion yuan ($176 billion) in the first quarter of 2020, when the market was recovering from the Covid-19 pandemic.
The plunge in new stock fund inflows reflects the growing uncertainty and risk aversion among investors, who have been spooked by the regulatory crackdown and the slowing economic growth. China’s gross domestic product (GDP) grew by 4.9% year-on-year in the third quarter of 2023, down from 7.9% in the previous quarter and below the market expectation of 5.2%. The slowdown was mainly due to the impact of the Delta variant of the coronavirus, the power shortages, and the debt woes of China Evergrande Group, the country’s largest property developer.
China’s Stock Market Underperforms Global Peers
China’s stock market has also underperformed its global peers amid the regulatory turmoil and the economic headwinds. The benchmark Shanghai Composite Index has fallen by 13.6% year-to-date, while the Shenzhen Component Index has dropped by 16.4%. The CSI 300 Index, which tracks the performance of the largest and most liquid stocks in the A-share market, has declined by 15.9%. In comparison, the S&P 500 Index in the U.S. has risen by 21.6%, the Euro Stoxx 50 Index in Europe has gained 18.4%, and the Nikkei 225 Index in Japan has advanced 9.9%.
The underperformance of China’s stock market has also led to a massive outflow of foreign capital. According to data from the People’s Bank of China, the net sales of A-shares by foreign investors through the Stock Connect program, which links the mainland and Hong Kong markets, reached 113.4 billion yuan ($16.6 billion) in the third quarter of 2023, the highest level since the program was launched in 2014. The net sales in September alone were 90.2 billion yuan ($13.2 billion), a record high for a single month.
China’s Regulators Try to Restore Investor Confidence
China’s regulators have tried to restore investor confidence and stabilize the market by issuing various supportive measures and reassuring statements. For instance, the China Securities Regulatory Commission (CSRC) has announced that it will reduce the transaction fees for stock trading, simplify the approval process for initial public offerings (IPOs), and encourage listed companies to pay dividends. The CSRC has also said that it will enhance communication and cooperation with foreign regulators and investors, and that it will respect the market rules and the legitimate rights and interests of all market participants.
The central bank and the finance ministry have also taken steps to ease the liquidity and fiscal pressures in the economy, such as cutting the reserve requirement ratio (RRR) for banks, lowering the interest rates for medium-term lending facilities (MLFs), and increasing the issuance of special local government bonds. These measures are expected to inject more than 2 trillion yuan ($293 billion) into the economy and support the recovery of growth.
China’s Stock Market Still Offers Long-Term Opportunities
Despite the short-term challenges and volatility, some analysts and investors believe that China’s stock market still offers long-term opportunities and value. They argue that the regulatory actions are aimed at addressing the structural problems and risks in the economy, and that they will eventually benefit the long-term development and stability of the market. They also point out that China’s stock market is still relatively cheap compared to its historical and global valuations, and that it has a diversified and dynamic range of sectors and companies that can benefit from the country’s economic transformation and innovation.
For example, John Lin, chief investment officer of China equities at AllianceBernstein in Singapore, said that China’s policymakers are doing just enough to avoid problems in the financial sector and the property market, and that their efforts will pay off in the coming years. He said that China’s stock market is still attractive for long-term investors, especially in the areas of consumption, health care, and technology. He also said that China’s dividend payout ratio is expected to increase, which will boost the income and return of investors.
