By Vaibhav Tandon

Gross domestic product (GDP) is often considered the most important indicator of the health of an economy.  But there are other measures that provide different perspectives, which can be more timely and impartial.  The level of equity markets is one such indicator that provides a window into what’s going on. 

This is an especially important reflection for China.  The official statistics reflect real economic growth of 5% in 2023, among the best in Asia.  But those statistics have a history of being favorably constructed.  By contrast, Chinese equities were the worst performers in the Asia-Pacific region in 2023.  This year is not off to a great start either, with the CSI 300 Index down about 5% in January.  Since the peak reached in February 2021, the index has slumped 44%. 

Proximity to China is proving to be expensive for Hong Kong equities as well.  Mainland companies account for over two-thirds of the Hang Seng Index’s market capitalization; the index closed 14% lower in 2023, its fourth consecutive yearly loss.  Chinese and Hong Kong stocks combined have lost $6 trillion in value in the last three years.

China’s stock market is struggling at a time when other global indexes have provided double-digit returns.  The U.S. S&P 500 has soared to fresh records while Japan’s Nikkei 225 has been trading at a multi-decade high. 

The pessimism reflected in the markets is becoming increasingly hard for Chinese policymakers to ignore. Authorities are under pressure to arrest a decline in investor confidence, and they have stepped up measures to stem the rout.  Regulators have tightened capital outflows by limiting access to funds that invest in offshore securities.  They have been issuing unofficial instructions or “window guidance” to some of the biggest investors, discouraging them from being net sellers of equities.  Last week, officials announced curbs on short-selling and cuts to bank reserve requirements to inject more liquidity into the financial system.  

Media reports suggest that Chinese officials are seeking to do more to stem the selloff.  According to Bloomberg, policymakers are mulling a CNY 2 trillion ($280 billion) stabilization fund to buy onshore shares through the Hong Kong exchange link. 

The above interventions, however, have done little to reverse negative investor sentiment.  China’s property market remains troubled.  Home prices fell the most in almost nine years last December.  Local governments are deeply indebted.  Deflationary pressures are building.  Foreign investments have tumbled.  Geopolitical tensions with the U.S. have little prospect of easing, especially in a U.S. election year.  Recovery in corporate earnings looks unlikely with these issues unresolved.  The selloff is discouraging consumer spending and business investment, adding to the list of troubles.

The bear market for stocks may not be as painful as the downturn in property markets, which poses risks to financial stability.  Equities account for only a fraction of household wealth relative to real estate.  However, the slump in equities is deepening despair among small investors, who make the bulk of stock purchases.

Presenting a rosier picture won’t be enough to cause a turnaround in investor sentiment.  That will require authorities to address the host of challenges plaguing the Chinese economy.  Better headline numbers alone won’t help China avoid negative headlines.