Why China’s Unpredictable Stock Market Continues to Flummox Analysts

China’s mainland stocks halted a one-month tumble last week.

Isaac Lawrence/AFP via Getty Images

A slew of concerns are muddying an already unpredictable market for Chinese stocks, leaving analysts with their work cut out for them.

Mainland stocks halted their one-month tumble of 10%, climbing 2% last week and inching up further Tuesday. China is experiencing more regional Covid surges, and has responded to the situation as it said it would—with zero tolerance for spread, regardless of economic consequences. Tensions between the world’s two largest militaries and economies remain at their touchiest point in recent memory following U.S. House Speaker Nancy Pelosi’s visit to Taiwan

There are intermittent signs of a possible renewed tech crackdown, after months of reprieve, and the country’s property crisis, which in a worst-case scenario threatens to crush China’s tepid economy, is as shaky as ever.

There is even the consideration of what has been spookily donned the “demon stock.”

A demon stock is “usually a small cap with a relatively low starting price of below 20 yuan ($3),” Chinese financial analyst Lu Daoyin told Chinese media. Comparing them to so-called meme stocks in the U.S., Lu said they “must align with the latest and hottest topics.”

Finally, the general macro outlook is perhaps the most debated forecast. Some predict a weak second half of the year but a robust recovery in 2023 and 2024, of above 5%. Yet, leading China strategist Hong Hao told Bloomberg News it would be “very optimistic to expect China’s economy to grow even at an annual rate of 2% over the next 10 years as the once-hot property sector cools off.”

China flummoxed observers earlier this year as major global markets tanked while mainland and Hong Kong shares rose. That two-month golden period followed the end of the draconian lockdown of Shanghai amid the country’s worst Covid outbreak. China stocks have since pared nearly all of those gains, even with the rebound last week.

“China’s [mainland] A-shares saw a rangebound, generally weaker trend since July under both domestic and overseas influences,”

China International Capital Corporation

(CICC) said in a note. July marked the sixth consecutive month of foreign outflows from China’s stock market, according to a recent report by the Institute of International Finance (IIF).

IIF placed blame on the developments mentioned above, and added, “For the coming months, several factors will influence flows dynamics, among these the timing of inflation peaking and the outlook for the Chinese economy.”

While China went against the grain during its recent bull run, it is defying markets in another area now.

Initial public offerings on the mainland have grown to $58 billion so far this year, the most ever for a six-month period, according to Bloomberg data. Driving that IPO boom are five listings exceeding $1 billion, with an additional one in the queue. By comparison, New York and Hong Kong have seen one IPO each during the same period, with none in London.

For China Beige Book CEO Leland Miller, it is a simpler calculation than running around factoring in half a dozen developments that might influence “normal” markets.

“Despite what a lot of fund managers believe, Chinese stocks aren’t correlated to the real economy. They’re essentially bets on government policy,” he said.

“Why have stocks gotten crushed while so many Wall Street banks have urged clients to go long? Because those analysts were absolutely convinced that Beijing would launch big stimulus and chase money into equities in order to boost sentiment as the economy slowed,” he told Barron’s.

Others agreed, with caveats.

“The A-share market is a sentiment-sensitive or even sentiment-driven one. I won’t say that it is not correlated to the real economy. But the expectations and estimates on macro economy, government policies and their impacts, internal and external uncertainties as well as geopolitical tensions matter the most,” said Bruce Pang, chief economist of Greater China at

Jones Lang LaSalle

in Hong Kong.

Pang noted top leaders’ de-emphasis on hitting their original “around 5%” GDP growth target, and their concern more with properly implementing existing policies rather than unleashing any massive stimulus measures.

“So the scale and impact of policy spur could be lower than consensus expected. This is the major reason behind A-shares’ recent sluggish performance, together with potential cuts on earnings estimates and weak fund onflows amid clouded uncertainties and rate hikes of other major economies,” he told Barron’s.

Goldman Sachs Group

wrote recently that it put energy and banks as overweight due to their value, and internet, media and entertainment due to their growth.

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