- Hong Kong’s Hang Seng Index saw its second largest one-day drop on Monday, tumbling almost 10%, while the Nasdaq Golden Dragons Index of US-listed Chinese tech groups fell more than 14%.
- China’s economy is facing multiple headwinds including a property market downturn, slowing exports and the impact of the country’s strict zero-Covid policy.
Chinese stocks endured a torrid week following the conclusion of the Communist Party congress in Beijing, which confirmed Chinese President Xi Jinping’s unprecedented third term in office and saw China’s senior leadership stacked with loyalists that prioritise national security over economic growth.
Hong Kong’s Hang Seng Index saw its second largest one-day drop on Monday, October 24, tumbling almost 10%, while the Nasdaq Golden Dragons Index of US-listed Chinese tech groups fell more than 14%. Both indices edged higher on Tuesday and Wednesday on the hope central banks may slow the pace of rate hikes. The Hang Seng Index, however, remains down more than 34% year to date1.
“The appointment of Xi Jinping as President of China for the third term, and potentially longer along with his aides in key positions, has unnerved the market,” says Kunjal Gala, Head of Global Emerging Markets, Federated Hermes Limited.
“Investors believe the appointments will embolden President Xi to continue unopposed with his past policies. Policies such as zero-Covid, controlling the rise of internet giants, and geopolitical tensions with the US over Taiwan are likely to remain in place with little sign that the new team will pursue any meaningful economic reform,” Gala adds.
The sell-off was compounded by the release of economic data – delayed during the party congress – which showed China’s gross domestic product grew by 3.9% in the third quarter, below the government’s annual target of 5.5%2.China’s economy is facing multiple headwinds including a property market downturn, slowing exports and the impact of the country’s strict zero-Covid policy. President Xi offered no timeline for an easing of the restrictions during the week-long congress.
“Many investors had held an overly optimistic view the congress would act as a panacea in lifting the overhangs for the economy once President Xi secured a third term, However, markets are now further discounting the relative and near-term negative implications of Xi’s third term and the challenges the country faces to transition to a more sustainable growth pathway,” Gala adds.
Figure 1: Nasdaq Golden Dragons Index on a dip
The appointment of President Xi’s close allies to key leadership positions may have caused some investors to finally throw in the towel, says Jonathan Pines, Head of Asia ex-Japan, Federated Hermes Limited. “Tech stocks, in particular, took a hit because they are often more likely to be held by foreign investors and could potentially be hurt most by less business-friendly policies,” Pines says.
In addition, the US government has made two recent moves likely to be seen by China as escalatory, says James Rutherford, Head of European Equities, Federated Hermes Limited, significantly increasing the hurdles for selling high-tech semiconductor technology products to China, as well as publicly charging Chinese intelligence officers with alleged espionage and intimidation activities in the US.
Weak third-quarter results by leading US tech groups has further damped the outlook for the global tech sector. The US blue-chip S&P 100 Index closed down 1.3% on Wednesday3.
Geopolitical tensions, particularly China’s relationship with the US, remain the key risk for China equities rather than domestic policy driven concerns, Pines continues. “Although China lacks the quick self-correcting mechanisms more apparent in democracies to address domestic policy missteps, there are mechanisms that will exert some pressure on the authorities to act if growth continues to be threatened to the extent it affects the economic wellbeing of its citizens,” he says.
Investor fears about what could go wrong in China has meant significant risk has already been priced in and Chinese stock valuations currently stand at a record low relative to the rest of the world, Pines says, adding that despite market concerns, the outlook for the country could just as easily brighten. “Zero-Covid policies could be reduced or abandoned, a purported meeting between US President Joe Biden and President Xi could result in a lessening of tensions, China could unexpectedly adopt pro-business policies, the government could act more decisively to help the property sector, or adopt a massive fiscal or monetary stimulus,” Pines adds.
For further insights into global equities and supply chains please see Sustainable Global Equity, Q3 2022 report