Baoer Zhao Reprinted from: New York Times Chinese website：
Data on the performance of Chinese factories, a benchmark for the economy, are mixed. JADE GAO/AGENCE FRANCE-PRESSE — GETTY IMAGES
Originally there was no need to consider making such a bet. Investors expect a swift recovery in the world's second-largest economy as China reopens after nearly three years of pandemic lockdowns. China's stock market will surge.
But that is no longer the case. Chinese stocks traded in Hong Kong briefly entered a bear market this week, falling more than 20% from January highs. Mainland stock markets have also fallen this year.
China has long been the driving force of global economic growth, but the stock market decline reflects growing optimism about the viability of the country's post-coronavirus recovery. Despite ongoing geopolitical tensions between China and the United States, the two countries remain inextricably linked economically and commercially.
"All signals from China indicate that the economic rebound is stumbling and struggling," said Teng Xiao, an analyst at CMC Markets in Auckland, New Zealand.
Beijing is grappling with lower-than-expected consumer spending, slowing home sales and the vagaries of manufacturing. A weaker currency compounds the problem. It remains uncertain what actions, if any, the Chinese government may take to support growth.
Last year, China implemented multiple lockdown measures due to the COVID-19 epidemic, which dealt a heavy blow to the economy. The economy grew by 3%, one of the slowest growth rates in decades and well below Beijing's own targets and below 2021 growth rates.
The real estate sector has been a source of pain for stock investors, with developers saddled with heavy debt that has characterized the industry. QILAI SHEN FOR THE NEW YORK TIMES
Last fall, authorities sent shockwaves through the stock market as they unveiled stimulus measures aimed at supporting the real estate sector. There was another shock in December as the strict “clearance” policy came to an abrupt end. The stock market entered the new year on an upward trend, peaking in late January.
China's economy grew by 4.5% in the first three months of this year (much of which came from consumption) and appears to be on track for recovery. Spending has been strong in recent months, especially in the luxury goods and food and drink sectors, but has increasingly fallen short of investor expectations. High youth unemployment makes the outlook even bleaker.
While the West grapples with inflation, China is grappling with the opposite and potentially more damaging form of deflation, in which persistently low prices drag down the economy by suppressing corporate profits and wages.
"Domestic demand remains weak," Teng Xiao said.
As a result, many economists have lowered their forecasts in recent weeks, causing stocks to fall. But some analysts - including those at Nomura and Barclays - still expect China's gross domestic product to grow faster this year than the 5% forecast by the government.
Forecasts are lower for the United States, the world's largest economy, but U.S. stocks are performing much better than China. The S&P 500 is up about 12% this year.
Recent decisions by the Chinese Communist Party and its top leader, Xi Jinping, have hurt stock market sentiment. The crackdown on consulting firms with overseas ties has spooked some foreign companies and investors and once again raised questions about the viability of international companies doing business in China.
Consumer spending has been strong in recent months but has increasingly fallen below investor expectations. QILAI SHEN FOR THE NEW YORK TIMES
“The recovery has stalled, in part because Beijing has been unable to boost confidence among consumers and business investors,” economists at Nomura Securities wrote in a note last month. "As disappointment sets in, we see rising risks of a downward spiral leading to weaker activity data, higher unemployment, continued deflation, lower market rates and weaker currencies."
But some observers believe investors simply misjudged the unprecedented reopening of China's economy. And they ignore a shift by authorities to prioritize national security concerns over economic ones.
“The way China manages its economy is completely different,” said DBS Bank Chief China Economist Leong Siu Kee. He also said authorities were unlikely to respond to the stock market plunge by taking aggressive steps to push up share prices, as they have done in the past. Policymakers in Beijing pay more attention to economic indicators such as manufacturing. Liang Shauji said that from this perspective, China’s economy “is not too outrageous.”
China's factory activity picked up in May, a survey of the private sector showed on Thursday, in stark contrast to official data released a day earlier that showed manufacturing continued to contract. The inconsistent signals have broader implications because China's manufacturing is closely tied to exports, which are an indicator of global demand. Continued growth in manufacturing will help boost China's employment rate, consumer spending and ultimately the stock market.
For now, investors continue to sell off Chinese stocks. This year's biggest losers include online retailer JD.com and hotpot chain Haidilao, both down more than 20% this year, sending Hong Kong's Hang Seng China Enterprises Index to its lowest closing level of the year on Thursday. After Friday's rebound, the index is about 17% below its January high. The CSI 300 index, which tracks the largest companies in Shanghai and Shenzhen, has fallen about 8% since peaking in January.
The real estate sector continues to cause pain for investors. Data released this week by China Real Estate Information Group showed that real estate sales for the 100 largest companies fell about 14% in May from the previous month.
China's real estate problems - with developers mired in debt and leaving unfinished apartments for buyers with mortgages - have led to expectations that the country's central bank will have to cut interest rates this year.
Nomura and Barclays both forecast China's economic growth to improve significantly - close to 8% - in the three months to June. Growth in the next two quarters of this year will slow to levels last seen earlier this year, according to the companies.
Along the way, analysts expect stock market performance to improve. "Excessive pessimism usually corrects itself," said Leong.
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