China Market Woes Far From Over, Analyst Says: Talk Is Cheap, But Urgent Action Needed

While China’s ailing stock markets have regained some ground in the past couple of sessions, thanks to pledges and rhetoric that market losses will be addressed, there are more fundamental risks at play that equities could continue their downward spiral throughout 2024.

Primary among these is economic growth. Without growth, corporate profits decline, unemployment rises and consumers stop spending.

And the outlook doesn’t look good according to analysts at the Asia Society Policy Institute (ASPI), a New York City-headquartered think tank.

Economy Continues To Struggle Post Covid-19

Foremost, says analyst Nathan Levine, is China’s economy will continue to struggle, having failed to fully bounce back following a series of punishing COVID-19 lockdowns.

“China's economy faces deep structural problems and is increasingly running into the limits of its current growth model,” says Levine.

For decades, he adds, China relied on investment-led growth as it showered infrastructure, real estate and manufacturing sectors with cash, while consumers maintained high rates of savings. That was OK, as China exported its finished goods to hungry consumers around the world.

But that model no longer works as overspending — particularly on the real estate boom — and China’s increasingly tense trade relations with the U.S. and other parts of the world have stifled exports.

“China is now awash in high levels of debt, and overspending on a property construction bubble has led to a significant crisis,” says Levine.

“Further weighing on the economy is largely stagnant productivity growth and a private sector shaken by President Xi Jinping's insistence on growing the Party-state's control over the economy and finance.”

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Meanwhile, domestic consumer demand has only become more sluggish and Levine believes restoring robust growth will hinge on whether Chinese consumers can be convinced to spend, and private sector entrepreneurs to invest.

“A broader financial crisis or economic recession is unlikely, but China's economy is likely to continue to at best muddle through in 2024 rather than demonstrate a significant recovery,” he concludes.

Leadership Becoming More Autocratic

So what is this likely to mean for the markets? If, as Diana Choyleva, also of the ASPI, believes, Xi Jinping’s focus will be on security and the re-emphasis of Marxist-Leninist ideology, then it’s not looking good.

“Private entrepreneurs have reduced their willingness to invest for the long term, while foreign investors have also become wary and are increasingly pulling their money from China,” she says.

Measures taken so far to restore market confidence, beyond a few pledges and some short-term, Band-Aid market intervention, amount to a change of leadership at the country’s securities regulator.

What happens to further these pledges in the coming days will be paramount, as markets aren’t easily fobbed off by empty promises. So, authorities must act quickly.

On Wednesday, the mainland indexes were higher again, with the Shanghai Composite up 1.44% and the Shenzhen up 2.9%. However, the Hang Seng in Hong Kong dipped 0.3%.

The iShares MSCI China ETF MCHI, an exchange-traded fund that tracks blue-chip stocks on the Hang Seng, was down 1.7%.

Among its top holdings, Tencent Holdings Ltd TCTZF shares were down 1.26% and Alibaba Group Holding Ltd – ADR BABA slid 5.93% after its fourth-quarter earnings failed to meet market expectations.

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