China’s stock market has suffered its worst month since 2018, as investors dumped Chinese securities amid fading hopes of state support and growing regulatory risks. The benchmark Shanghai Composite Index fell 5.2% in August, its biggest monthly drop since October 2018, while the tech-heavy Shenzhen Component Index plunged 9.4%, its worst performance since December 2018.
The sell-off was triggered by a series of regulatory crackdowns on sectors such as education, technology, gaming, and property, which rattled investor confidence and sparked capital outflows.
According to data from Goldman Sachs, global hedge funds sold $6.6 billion worth of Chinese stocks in August, the most since February 2018. The bank said that all types of stocks were sold, but A-shares, those listed in the domestic stock market, led the sell-off, comprising 60% of it. The bank also noted that the selling pressure was “aggressive” and “broad-based”, as hedge funds reduced their exposure to both growth and value stocks.
Investors lose hope of state intervention
One of the main reasons for the sharp decline in Chinese stocks was the lack of state intervention to prop up the market, which had been a common practice in previous downturns. Investors had expected the government to step in with supportive measures, such as easing monetary policy, boosting fiscal spending, or issuing reassuring statements, to stabilize the market and restore confidence. However, none of these actions materialized, as the authorities seemed more focused on pursuing their long-term goals of curbing financial risks and promoting social equality.
Some analysts believe that the government’s stance reflects a shift in its attitude towards the stock market, from viewing it as a tool to boost growth and innovation, to seeing it as a source of speculation and instability. Others argue that the government is still willing to intervene when necessary, but only when the market conditions are more favorable and aligned with its policy objectives.
Outlook remains uncertain amid economic slowdown and geopolitical tensions
The outlook for China’s stock market remains uncertain, as the country faces multiple challenges on both domestic and external fronts. On the domestic front, China’s economic growth has slowed down in recent months, due to the impact of the Delta variant of Covid-19, supply chain disruptions, power shortages, and environmental regulations. The latest official data showed that China’s industrial production grew by 5.3% year-on-year in August, down from 6.4% in July and below market expectations. Meanwhile, China’s retail sales rose by 2.5% year-on-year in August, the slowest pace since August 2020 and far below the forecast of 7%.
On the external front, China faces rising geopolitical tensions with the US and its allies, over issues such as trade, human rights, cybersecurity, and Taiwan. The recent announcement of a new security pact between the US, UK, and Australia, which involves providing nuclear-powered submarines to Australia, has angered China and sparked a diplomatic row. China has accused the three countries of undermining regional peace and stability, and threatened to take countermeasures.
How to invest in Chinese stocks amid volatility
Despite the challenges and uncertainties facing China’s stock market, some analysts and investors remain optimistic about its long-term prospects, citing its large size, diverse sectors, strong fundamentals, and attractive valuations. They argue that the current sell-off offers a good opportunity to buy quality stocks at bargain prices, especially those that are aligned with the government’s policy priorities and have strong growth potential.
However, investing in Chinese stocks also requires caution and patience, as the market is likely to remain volatile and unpredictable in the short term. Investors should be prepared for further regulatory shocks and policy changes that could affect different industries and companies. They should also diversify their portfolio across different markets and asset classes, to reduce their exposure to country-specific risks.