The Chinese stock market witnessed a significant downturn on Monday, with small-cap stocks trading on the mainland plummeting nearly 9% at their lowest point. The sharp decline was largely attributed to former U.S. President Trump’s threat of initiating a renewed trade war if re-elected in November.
According to FactSet data, China’s small-cap stock gauge, the China 1000 index (CN:512100), closed down 6.2% at 4293.07. Although it managed to recover slightly from its lowest point during the session, it still recorded its lowest closing since mid-2019. Year-to-date, the index has fallen more than 27% according to the same data.
The iShares China Large-Cap ETF (FXI) performance indicates that Chinese stocks have been experiencing losses for the past four consecutive years. The ETF, which trades during U.S. market hours, has seen a decline of nearly 11% so far this year until Friday’s closing.
On the other hand, large-cap stocks in China performed relatively well on Monday. The CSI 300 ASHR index, representing large-cap stocks, rose by 0.7% to reach 3,200.42. Meanwhile, Hong Kong’s Hang Seng Index (HK:HSI), the benchmark for the local stock market, experienced only a minor drop of 0.2% to close at 15,510.
China’s Shenzhen Composite (CN:399106), consisting of up-and-coming companies in the technology sector, experienced a significant slump of 3.9% to reach its lowest level since February 2019, as per FactSet data.
Jason Hsu, chief investment officer at Rayliant Global Advisors, explained through email that large-cap Chinese stocks benefited from investor confidence, who anticipated the support of the country’s “national team” for the largest stocks in China.
China’s Stock Market in Turmoil
China’s stock market has been facing significant challenges due to various factors, including the economic impact of the COVID-19 pandemic, a crisis in the country’s property sector, and rising youth unemployment. Furthermore, the threat of a renewed trade war between China and the United States has added to the concerns. As a result, Chinese and Hong Kong-traded shares have witnessed a massive erosion of value totaling $7 trillion since early 2021.
The National Team’s Intervention
To mitigate the situation, China’s government has activated its “National Team,” a group of state-backed investors assigned to inject capital into the market during sell-offs. This move aims to stabilize the stock market and prevent further outflows. However, this intervention has had unintended consequences.
Imbalanced Market Dynamics
As part of their strategy, the National Team has heavily invested in mega-cap stocks, thereby bolstering the market index. While this has provided support to large state-owned enterprises, it has also resulted in an adverse impact on market breadth. Smaller cap and non state-owned enterprise stocks have experienced a significant withdrawal of liquidity as investors flock towards securities favored by the National Team. Consequently, market breadth has become increasingly negative.
Lingering Economic Challenges
China’s stock market woes are closely intertwined with the country’s economic struggles. The resurgence of COVID-19 cases prompted strict lockdown measures, hampering economic recovery. Moreover, the property sector crisis and a surge in youth unemployment have exacerbated the situation. Furthermore, the potential trade conflict between China and the United States, exemplified by former President Donald Trump’s threats of imposing substantial tariffs on all Chinese-made goods, has heightened concerns about the future landscape of international trade.
The repercussions of China’s stock market downturn have prompted widespread dissatisfaction among its citizens. Thousands of locals have taken to unusual platforms, including a post by the U.S. Embassy in Beijing on China’s Weibo social-media platform, to voice their complaints about the dire situation. This demonstrates the depth of frustration among investors and the general public.
China’s stock market is currently facing severe challenges stemming from a variety of economic and geopolitical factors. While the National Team’s intervention aimed to stabilize the market, it inadvertently contributed to negative market breadth. It remains to be seen how China will navigate these turbulent times and restore confidence in its stock market.