Chinese Stocks Dip 8% as Plenum Disappoints Investors

Chinese stocks down 8% from February peak as investors brace for lackluster Third Plenum outcomes.

By Barry Stearns

7/10, 19:54 EDT

Key Takeaway

  • Investor sentiment toward Chinese stocks is deteriorating ahead of the Third Plenum, with the CSI 300 Index down 8% from its February low.
  • Foreign investors have been net sellers for most of the past month, potentially flipping year-to-date flows to negative.
  • Sectors like electric vehicles and high-tech manufacturing may benefit from policy focus, while commodities and energy markets await potential support measures.

Market Sentiment Deteriorates

Sentiment toward Chinese stocks has taken a downturn ahead of the upcoming Third Plenum, a key political gathering. Onshore shares have been declining since mid-May due to renewed trade tensions, a persistent property crisis, and a more frugal consumer base, which have collectively darkened the growth outlook. Although benchmarks are still trading above levels seen during the February rout, some indicators suggest that sentiment is nearly as negative as it was back then.

Yang Tingwu, a partner at Fujian Tongheng Investment Ltd., commented, "The consensus among investors is that there is almost nothing when it comes to policies unveiled at the meeting that could be potent enough to turn around sentiment. On the flip side, that also means there won’t be much of a disappointment regardless of what the Plenum brings."

Trading activity has thinned, with turnover in Shanghai and Shenzhen dropping to levels seen during previous market routs. Outstanding margin balance, often seen as a proxy for risk appetite, has also edged lower, though it remains higher than earlier this year. The benchmark CSI 300 Index is 8% above its February nadir, but the valuation picture remains bleak. On Wednesday, 856 companies in Shanghai and Shenzhen bourses traded below book value, compared to 930 during the depth of the February rout.

Foreign Investor Activity

Foreign investors have been net sellers in all but three sessions over the past month through Tuesday. If this trend continues, July could mark the second consecutive month of withdrawals, potentially flipping year-to-date flows to the negative. This is in stark contrast to the inflows seen from February to May.

Gary Dugan, CEO of The Global CIO Office, noted, "What will define the market’s direction is just how convincing the policies are perceived by investors as addressing the structural slowdown in growth and the challenges in the real estate sector."

The MSCI China Index has entered a technical correction, and a gauge of Chinese equities listed in Hong Kong is nearing the same milestone. The CSI 300 Index capped a seventh week of losses last Friday, marking the longest losing streak since early 2012. Historically, the performance of the Shanghai Composite Index one week and one month after previous Third Plenums has often been lackluster.

Sector-Specific Expectations

Several sectors are under the spotlight as traders and analysts anticipate the outcomes of the Third Plenum. Xi Jinping's campaign to foster "new productive forces" is expected to gain attention, covering areas like electric vehicles, spaceflight, and quantum technology. Barclays strategists Kaanhari Singh and Yingke Zhou noted that further efforts to gain dominance in high-tech manufacturing would benefit stocks in these sectors.

Fiscal and tax system changes may also be on the agenda, potentially boosting information-system development. AVIC Securities Co. analysts, including Zou Runfang, wrote, "There are investment opportunities in fiscal and tax digitalization-related fields."

State-owned enterprises (SOEs) could see efforts to boost efficiency, which might structurally enhance their return on equity and valuations. Zhongtai Securities analysts, including Xu Chi, mentioned, "Brokerages and leading state-owned enterprises may provide strong support for Chinese stock gauges given the likely outcomes from the Third Plenum."

Commodities and Energy

The Third Plenum is also expected to impact commodities markets. Paul Bloxham, HSBC Holdings Plc’s chief economist for global commodities, stated, "We are watching and waiting to see what gets delivered in the property, infrastructure, and manufacturing sectors."

The solar sector is facing challenges due to excess capacity and fierce competition, which have pushed prices to record lows. Nationwide trading that allows clean power to be delivered to where it’s needed, based on market prices, could help solve the industry’s issues with bottlenecks and wastage.

Copper has retreated from a record high in May, and Citigroup Inc. expects the Plenum to deliver greater support from investment in the grid and clean energy, as well as more help for the property market. The steel market, heavily impacted by the nation’s real estate woes, could benefit from restructuring the country’s finances away from heavily indebted local authorities.

Oil refining is another sector under scrutiny. Amy Sun, a project manager at GL Consulting in Guangzhou, mentioned that Beijing might consider measures to raise funds by broadening the tax take, which could impact independent refiners, or "teapots," that have a history of skirting taxes.

Street Views

  • Yang Tingwu, Fujian Tongheng Investment Ltd. (Bearish on Chinese stocks):

    "The consensus among investors is that there is almost nothing when it comes to policies unveiled at the meeting that could be potent enough to turn around sentiment."