For the past year, Chinese stocks have become intrinsically tied to the ebb and flow of the Washington and Beijing trade war rhetoric, however, certain indicators measuring the financial health of the market are beginning to warn of further trouble.
While the CSI 300 – including Shanghai- and Shenzhen-listed stocks – has soared more than 29% since the start of the year only roughly a third of the 300 companies listed have this year outperformed the gauge– the smallest in any rally since 2009 – according to data compiled by Bloomberg. In comparison, about half of the companies listed on the S&P 500 and the Stoxx Europe 600 indices have outperformed the gauge this year.
The CSI 300 has a YTD return of 30% and, according to Bloomberg, roughly 10 stocks within the index account for half of the returns –– such as mega cap stocks like Kweichow Moutai and Ping An Insurance which accounted for 10.3% and 13.5% of index gains respectively.
The CSI 300's year-to-date return
The concentration is led by overseas investors choosing to focus on specific mega caps. But with so few stocks underpinning the rally, this increases risk of a reversal in the near-term, Goldman Sachs strategists wrote in a note last week.
Is a bubble about to burst?
Last week the People’s Bank of China (PBOC) continued to provide stimulus, cutting its one-year lending rate for the second time in as many months. However, the head of the PBOC Yi Gang said China is in “no rush” to add any further monetary stimulus.
The slowdown, which is partly induced by the trade war with the US has only grown more pronounced in recent months, prompting the central bank to also lower bank reserve requirements to lower rates on commercial lenders.
Julian Evans-Pritchard, senior China Economist at Capital Economics, said in a note last Friday that “with economic activity likely to come under further pressure in the coming quarters and monetary easing so far failing to generate much of a pick-up in credit growth, we think the PBOC will need to start engineering larger declines in the Loan Prime Rate before long,” according to Reuters.
“We think the PBOC will need to start engineering larger declines in the Loan Prime Rate before long” - Julian Evans-Pritchard, senior China Economist at Capital Economics
As a result, the CSI 300 index has plunged 5.3% since reaching a high of ¥4120.61 on 19 April alongside the Shanghai Composite, which has fallen 8.7% since reaching this year’s high of ¥3270.80 on 19 April. Even the less volatile China MSCI index has fallen more than 11% since its 12 April high.
And, as Bloomberg notes, while ¥168bn ($23.6bn) has been invested into Chinese stocks by foreign investors so far this year – with almost half of it going to the 20 biggest A shares – concerns of a sustained sell-off are intensifying. On Monday (23 September), ¥1.5bn ($211m) worth of shares were sold by foreigners, the most in nearly a month.
Spotting the reversal
Despite economic growth continuing to slow, there is still hope that stocks could be buoyed next month with the CSI 300 index climbing 1.9% since the end of August, as of Wednesday afternoon.
CSI 300 climb since the end of August
China Development Bank Securities analyst Sun Zheng told Bloomberg that there could be some potential triggers at the start of the quarterly earnings season in October, and possible further signals of monetary policy from the central bank.
For Zhang Gang a strategist at Central China Securities, investors will remain undeterred and continue to chase this year’s stock market favourites such as 5G developers WUS Printed Circuit Kunshan and Shennan Circuits, whose stock prices have more than doubled this year. “There are very limited choices in the market,” he told Bloomberg.