While domestic equities have certainly seen better days, true drama is unfolding in China, whose stock market is now on track for 11 straight red weeks, its longest losing streak in history.
Artificial intelligence (AI) and chip stocks have led the decline, with chipmakers MetaX and Moore Threads each losing roughly half their market value, while the technology-heavy ChiNext Index has dropped about 36%.
The CSI 300 Index, which tracks the performance of the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges, fell approximately 3.4% last week alone, now sitting at 4,036 points, around 20% below its June high of 5,059. Total losses since June now stand at $1.75 trillion.
Interestingly enough, though, the prolonged selloff comes despite a 4.5% year-over-year economic growth in the third quarter, and as such contributes to a striking disconnect between economic performance and investor sentiment.
Where are Chinese stocks heading?
Judging by the most affected sectors, the reversal from the strong rally earlier this year suggests that investors are primarily reassessing elevated valuations and responding to a broader global pullback in AI-related stocks.
Trying to mitigate the damage, state-backed funds have stepped in to support the market. For instance, exchange-traded funds (ETFs) inflows surged last week to their highest level since July, which could imply that authorities are trying to stabilize share prices, according to a Bloomberg report.
As mentioned, the disconnect between economic growth and stock-market performance has drawn significant attention, but not all of it is negative. For instance, Steve Hanke, an economist at Johns Hopkins University, argues the true state of the Chinese economy is not being reflected in equity prices.
“China’s economy BOOMS with its 3Q growth registering at a STRONG 4.5%/yr, while its stock market goes down,” Hanke wrote.
Data from China’s National Bureau of Statistics seem to back this view up, with GDP growing 4.5% year-over-year and keeping China within its annual economic growth target range of 4.5% to 5%. Nonetheless, the figures alone have done little to stop investors from worrying about the sustainability of global and domestic AI efforts.
Can the China stock market recover?
For now, the widening gap between China’s economic growth and equity performance remains a central question, and market participants are watching for signs that state effort can stabilize the market in the coming weeks.
Shaun Rein, managing director of China Market Research Group, however, told CNBC that he expects more selling and prolonged uncertainty due to AI bubble fears and falling consumer confidence.
Not everyone is bearish for the long term, however. For instance, the same network reported that State Street’s Daniel Gerard believes that China’s growing AI capabilities could eventually attract global investors back, even before earnings recover.
Featured image via Shutterstock
