Stocks in Hong Kong and, more broadly, mainland China's stock exchanges experienced their worst slump since the 2008 financial crisis at the end of October, possibly triggered by the head of state Xi's new concentration of power and still unclear future course. The Hang Seng Index fell over 7% shortly after the Communist Party Congress ended, with tech giants such as JD.com (-13.17%) Baidu (-12.20%) and Alibaba (-11.42%) each posting double-digit losses.
National Congress of the Chinese Communist Party
In late October, the 69-year-old Xi cemented his third term as general secretary of the Communist Party of China. This also saw some restructuring of leadership positions in the "Standing Committee." In the future, Xi Jinping will surround himself with the loyal, longtime faithful. Xi's third term in office could hold opportunities for investors, but also risks, as the U.S. and China could move further and further away from each other.
The new political direction of the leadership is not yet clear
Under the new leadership, economic and other policy directions will become more apparent in the coming weeks. So far, the government had refrained from taking large-scale stimulus measures. However, the party congress is likely to set the course for a new policy direction starting in 2023. Most observers assume that the focus of policy will not be on introducing new stimulus measures, but on implementing existing measures and letting them work. Boosting domestic demand to promote jobs, therefore, remains key.
Growth below expectations
China's GDP growth fell well short of expectations in the third quarter of 2022 and, in addition to the political uncertainties, also put pressure on the stock markets. Investors' concerns about the long-term prospects of the world's second-largest economy thus continued to grow.
The last few years have been challenging for China's economy, although a growth of over 3% is expected this year despite all the problems. Government efforts to mitigate a debt-fueled housing bubble hampered a once important growth engine, and restrictions from the Covid lockdown weakened business and consumer confidence and economic activity. However, the easing measures now announced should have a positive impact on economic activity in the months ahead.
China is the only major economy in the world that expects decent growth in corporate profits and gross domestic product next year. Given China's appetite for energy, cars and more is good news for the global economy, and it increases the chances that the world can stave off recession even as the U.S. and Europe weaken. China's economy could grow from 4.25% to 4.75% next year, with much of the recovery likely to come in the second half of 2023.
The end of the lockdown is an opportunity
A lot happened after the big protests in China's major cities in late November. Meanwhile, the government in Beijing has responded to the protests by making some changes to its approach. Health authorities announced a series of relaxations at the beginning of the week, publicly stating that asymptomatic and mild cases nationwide can now be quarantined and treated at home, rather than at central facilities that have frustrated citizens since the pandemic began.
The National Health Commission further stated that additional relaxations will be enacted in the coming weeks.
Unlike previous recoveries in China, it is unlikely that next year's recovery will be dominated by the construction sector. As a result, demand for industrial metals and other commodities may not prove quite as strong, and thus less likely to exacerbate global inflation. Instead, President Xi Jinping's government will likely focus on reviving domestic consumption. Beijing's crackdown on Internet companies and real estate developers, as well as the long lockdown, have caused consumer confidence to plummet this year. The latest reading in October was 86.8, down from 124 three years ago.
As China's reopening picks up steam and stimulus measures take hold, Chinese consumers could tap into the savings they've built up in recent months, much like U.S. consumers are doing. After three years of retrenchment, we could expect more travel and consumption.
What role does the U.S. dollar play in China?
One important observation at the moment is that the stock markets have been in recovery for several weeks. One reason for this is also the weakening US dollar. This seems to be an important catalyst for the market to recover in the future as well. The correlation is evident if you compare the US dollar with the Chinese yuan.
In the price action, one can currently see a failed breakout of the U.S. dollar last month on the upside, which led to an explosive rally in Chinese stocks.
Source: Tradingview, chart created by CMC Markets, weekly chart, 19.12.2022
What could happen to the Hong Kong 50 Index (HSI) ?
Since the all-time high in the summer of 2018, the Hong Kong stock markets have been on a downward trend. After the short interim recovery after the Covid crash, the index has known only one direction for more than 18 months and today reached the lowest level since the financial crisis. The absolute low at that time was 10,671 points. The low point in the current correction/crash was set on October 31 and the described support zone in the area between 14,653 points and 15,110 points could actually initiate a stabilization. At the peak, the index was able to recover by almost 4,000 points, so the current setback has important support in the area of 18,425 points. In principle, however, the recovery could continue in the direction of 20,940 points, as long as the intermediate low at 16,800 points is not undercut. If the index manages to exceed the previous high point at 22,500 points to the upside, a new bull market could even set in, attacking the all-time high at 33,500 points and completing a major bottoming out, with an upcoming rally to new records. If this does not happen, there is a threat of a further sell-off to the lows for the year and the area at 10,671/10,060 points.