Hong Kong Stocks Enter Bear Market as Concerns Grow Over China’s Real Estate Sector
Stocks in Hong Kong have officially entered a bear market, down 21 percent from their peak earlier this year. The decline comes as investors grow increasingly worried about the deteriorating condition of China’s real estate sector and its potential impact on the broader economy.
The slump in the Hang Seng Index, which mainly consists of mainland companies, is occurring amidst weakening growth in China’s economy. After three years of strict Covid restrictions, foreign investment has decreased, consumer spending has declined, and the housing market is in turmoil.
On Friday, the Hang Seng fell just over 2 percent, contributing to a 6 percent decrease for the week. So far this month, the index has plummeted more than 10 percent.
Bear markets, characterized by a drop of at least 20 percent from the most recent peak, are rare and reflect investors’ serious pessimism towards the economy.
At the heart of concerns over China is a real estate crisis. Among the companies hardest hit is Chinese real estate giant Country Garden, whose shares are trading well below one Hong Kong dollar. Another major property developer, China Evergrande, sought bankruptcy protection in the United States as it struggled to settle immense debt obligations.
Soho China, a Hong Kong-listed developer of office buildings in mainland China, reported a staggering decline in first-half profit of over 90 percent. The company attributed the sharp drop to the uncertain domestic and global business environment and the lack of restored market confidence.
Chinese stocks initially rebounded when the government lifted extreme “zero Covid” measures in December, which had severely restricted economic activity. However, hopes for a sustained recovery faded as concerning economic statistics emerged. Prices fell, increasing the threat of deflation, while retail sales, industrial production, and real estate investments missed economists’ expectations.
Additionally, China’s cornerstone exports have declined, and the country’s currency, the renminbi, has hit its lowest level in years. Major banks have downgraded their forecasts for China’s economic growth in 2023 to levels below the government’s target of about 5 percent. Official data indicates that China was growing at an annual rate of around 3 percent.
In response, Chinese policymakers have introduced measures to stimulate consumer spending and encourage banks to increase lending. The central bank, the People’s Bank of China, has slashed key interest rates to record lows. However, these efforts have failed to boost investor confidence or generate greater economic activity.
One pressing issue weighing heavily on China is its mounting debt, particularly at local governments heavily reliant on the real estate market. China’s overall debt now exceeds its national economic output, surpassing the debt-to-GDP ratio in the United States.
Consequently, the stock market continues to lose momentum. In Hong Kong, stocks have declined for six consecutive days and in eight of the past 10 trading sessions. Mainland China has also seen a significant decline, with the CSI 300 index, tracking major companies listed in Shanghai and Shenzhen, dropping approximately 10 percent since its January peak.
Global investors remain wary of China’s weakening economy, which has added to concerns about inflation and high interest rates in Europe and the United States. On Friday, European stocks fell, and U.S. futures remained flat. The S&P 500 is on track for its third consecutive weekly decline, eroding recent gains.
While the benchmark U.S. index has gained around 14 percent this year on the back of optimism surrounding technology, particularly artificial intelligence and chip makers, as well as resilient consumer spending, economists are increasingly worried about the decoupling between the strong U.S. economy and China’s disappointing performance.
Claudio Irigoyen, an economist at Bank of America, wrote, “The U.S. economy remains strong, while China continues disappointing at the margin and global investors are becoming increasingly concerned.” He noted that this “decoupling” could eventually “contaminate sentiment” enough to trigger a sharper fall in global markets.