Dark and Light in China’s Troubled Capital Market
Last week was an important week for China’s economy and financial sector. The official statistics released have painted a more uncertain picture of China’s near-term economic future than previously imagined. In response to the confirmed instability in the finance sector and various industries, China’s central bank was forced to react by cutting interest rates. China’s construction industry is in serious crisis, and the country’s construction giants are struggling to stay afloat.
The intertwining of China’s economy with the global economy is such that the minor and major crises resulting from the COVID-19 outbreak, the complete and comprehensive lockdown of major Chinese cities that continued until recent months, and the slowdown of China’s production cycle still affect the economy and consumer markets of various countries. However, beyond these, it is China’s capital market and finance sector that are facing significant fluctuations and serious enigmas about their future.
The value of China’s capital market is significant.
With the integration of Hong Kong’s capital market into China’s economy and finance, the country now controls one of the most important capital market networks in the world. The Shanghai and Shenzhen stock exchanges have been seriously attracting investment in recent decades, and in normal conditions before the COVID-19 crisis and even in 2021, China’s capital market, based on the accumulation of capital and financial turnover of various stock markets, was the most powerful and forward-moving in Asia and the main competitor to New York.
Various Crises and Capital Market Shocks
COVID-19 overshadowed everything, and in the process, various aspects of China’s politics and economy were affected. The policy of maximum counteraction against COVID-19 and the complete lockdown of cities and industries naturally planted the first seeds of doubt in the hearts of investors. Gradually, it became wise for many investors to reconsider their behavior towards the Chinese market.
Many prominent figures in the finance sector who had brought their money to the Chinese market began to diversify their stock portfolio, and gradually, and at the same time, seriously distanced themselves from bonds and stocks at risk. The earthquake in China’s construction sector was one of the central and most important factors that, from late 2021, showed mid-level and even major investors in China that perhaps in special circumstances, diversifying the investment portfolio is no longer the best strategy, and a round of selling stocks and perhaps even withdrawing capital is the most sensible policy.
Major Sales and Fluctuations
Periods of serious stock sales and capital withdrawal by foreigners affected China’s capital market. In the meantime, there was no serious doubt about the Chinese government’s ability to help the crisis-stricken sectors, and at the same time, what was important was the crisis in sectors like housing, which involved various international companies, especially American ones.
The crisis resulting from strict COVID-19 rules and city lockdowns, especially in a city like Shanghai, was in itself a serious issue that affected the performance of industries and companies and, consequently, the stock market. The importance of COVID-19 rules and the resulting constraints was demonstrated by the fact that the relative reopening of some cities and the easing of restrictions led to a good growth period for the Shanghai and Shenzhen stock markets in the months of April and June. Even though they remained in the red performance range over the year, they grew in conditions where the New York and European markets were negative during the same specific period, and this was only due to a period of relative easing of COVID-19 restrictions.
Investments in the production sector in China bore the burden of loss and damage from the housing sector, and stock transactions in this sector saw significant growth. However, periods of stock sales and capital exit from China have not stopped. China’s bond market has suffered serious damage in the past six months, and many current participants are betting on the loss of these bonds, placing their capital on further declines in these stocks.
New Statistics and Newer Enigmas
The release of official statistics and estimates of China’s economy by the country’s authorities heightened concerns about the crises facing this country. These concerns were so serious for the Chinese authorities themselves that they prompted the central bank to react quickly and cut interest rates. From Monday to Friday of the recently concluded week, experts from various sectors of the American and European economies have been analyzing and discussing these statistics and providing their estimates about the outlook for China’s various industries on one hand and the capital market on the other.
Growth in various sectors of China has been less than predicted, and youth unemployment has increased. In the one-month period from June to July, the decline in sales and pre-sales in the housing sector has become more serious and worrisome. Based on this and the 42% inflation and likely worsening estimates, experts are continuously reducing their estimates of China’s GDP growth. The domestic capital market in China and non-Chinese investors cannot rely on these developments.
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