EC What’s Behind The Weakness In Chinese Equities?

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On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed two factors that may be contributing to the recent downturn in China’s stock market. They also chatted about the divergence in monetary policies among key global central banks and provided an update on the performance of value stocks relative to growth stocks.

Two likely factors behind China’s stock-market slump

The Chinese equity market, which began the new year on solid footing, has cooled off considerably since mid-February, Cousley said, noting that the benchmark Shanghai Composite Index is down a little over 2% in the past three months. He attributed the recent weakness in Chinese equities to two primary factors: a gradual tightening in monetary policy and the country’s recent crackdown on big tech companies.

“China was the first country struck by the coronavirus pandemic, and also the first to recover—which has allowed it to become one of the first to start tightening monetary policy at the margin,” Cousley stated. However, he emphasized that the tightening has been gradual and that the country is unlikely to move to a restrictive stance on monetary policy any time soon.

The Chinese government’s increasing clampdown on big tech companies, including Alibaba, Tencent, and Meituan, is also likely responsible for the equity-market slump, Cousley said. “Chinese regulators, in particular, have been looking into the lending practices of several of these leading internet companies,” he stated, noting that the 20 most commonly used apps in China all provide some form of financing. The intensified government scrutiny, which began earlier this year, is clearly weighing on the market, Cousley remarked.

Despite these regulatory developments, the overall economic outlook for China still looks quite positive, he noted. “The most recent economic data, while not as exciting or as strong as what we’re seeing in other parts of the world, shows that the Chinese economy is still ticking along quite nicely,” Cousley said, adding that the International Monetary Fund is predicting a growth rate of 8% for China this year.

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Disclosures: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...

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