Market Overview

1 November 2022

China’s Stocks Need More Time to Become Attractive Investments

Chinese stock indexes dropped significantly over recent months. The CSI 300 index has lost 30% over the last ten months ending October at 3503 points, the lowest since March 2020. The Hang Seng index which mainly hosts mainland Chinese corporations dropped by 40% to reach 14843 points, the lows of 2009, while the Shanghai Composite index declined by 21% to reach 2888 points.

Global downside drivers for stocks are affected by specific Chinese factors that are getting even stronger recently. The global monetary tightening trend by major central banks is pressing on the demand for Chinese exports, while China itself is facing several economic weaknesses in the construction and financial sectors due to COVID-19 restrictions. China’s GDP only rose by 3.9% in the Q3 2022 compared to 4.9% in the same period of 2021. PMI’s in the production and service sectors plunged dramatically below 50 points, a mark which is considered to be a threshold between expansion and declining economic activity. U.S. corporations and some other non-U.S. firms are following the ban on supplying semiconductors or any semiconductor production equipment to China. This could be a major setback for China’s high-tech sector.

The recent Chinese Communist Party Congress that ended last week has been seen to create some  worries for investors as president Xi Jinping consolidated for himself the enormous power that goes along with him establishing himself for the third term as the Secretary General for the ruling party and cementing the government to follow a personal loyalty principle while also knocking out non-loyal candidates. This is believed to be a very negative factor for further economic developments in China, relations with the United States, and growing geopolitical tensions over Taiwan.

So, a downside trend for Chinese stocks is likely far from coming to an end, it may even be accelerated and outpace American and European stock indexes. However, some technical push back could happen. The Hang Seng index may rebound to 16200-17000 points. But it could not reverse the overall picture. The index may drop to 13600 points afterwards. The situation may change in 2023 when global stocks may fall to deep levels. Only then may negative factors for the Chinese economy be properly evaluated. In light of this it could be better to wait until then to open new investments in Chinese stocks or follow a high risk strategy to selectively invest in dividend stocks, and even slightly increase investment positions along with the falling market for a long-term perspective.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.94% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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