After the holidays, China's markets will be bumpy as risks increase

 After the holidays, China's markets will be bumpy as risks increase

Following the Golden Week holidays, Chinese markets are scheduled to open again against the backdrop of an unsteady global economy, which could dampen confidence resulting from the surge in domestic spending.

While the markets on the mainland were closed, a lot transpired elsewhere. Risk assets suffered as a selloff in US Treasuries touched off a global market reaction to increased worries about higher US interest rates lasting longer than expected. However, domestic tourism revenue increased year over year, supporting the theory that China's economy has likely bottomed out.

On Monday, mainland equities experienced a bumpy start due to the contradicting signals. On Friday, a measure of Chinese stocks listed in Hong Kong increased, helping to reduce its losses since September 28 — the last time onshore markets traded — to 0.3%. An index of the country's US-listed stocks gained 0.3% over that time. In relation to the dollar, the offshore yuan has declined by around 0.2%.

"The Golden Week information about consumption should give markets more confidence that supply is stabilizing, which may help boost morale for the consumer and service sectors," said Marvin Chen, an economist with Bloomberg Intelligence. But as marketplaces adjust to Fed rates that are higher for longer, there are growing external challenges.

Traders had been counting on a spike in holiday consumption to act as a new trigger for the market's sluggishness. In contrast to lockdown-hit 2022, tourism and spending soared, with 826 million tourists marking a 71% rise from the previous year. spending increased by around 130%. Other significant data released during the break also indicated that while the overall economy is improving, it is still far from roaring back.

Following a hotter-than-expected US jobs data, investors will assess these modest advances against worries about tighter Federal Reserve policies. A bigger interest rate differential with the US is thought to put more pressure on the yuan and speed up a capital flight, putting China in particular danger.

Before the break, the benchmark for onshore Chinese stocks, the CSI 300 Index, was down 4.7% for the year. It will lose all of its profits from the October 2022 reopening surge if prices continue to fall by 4.9%. Reaching that depressing milestone would encourage China naysayers, who still avoid the market owing to the worsening problems in the real estate industry and geopolitical worries.

With the crisis engulfing indebted developer China Evergrande Group and other significant builders showing little signs of abating, the housing market fall continues to be a significant overhang. Despite a recent flurry of property softening measures, home sales in September, a normally strong month for builders, continued to report double-digit drops from a year earlier.

However, some investors claim that the persistent selloff this year has produced some buying chances. There are also expectations that the approaching third plenum of the 20th Party Congress, which will bring together influential figures to address crucial issues in economics and reform, may hint at additional stimulus. The gathering, which is scheduled for late October or early November, might serve as a helpful catalyst, according to Chen of Bloomberg Intelligence.

According to Elizabeth Kwik, investment director of Asian equities at abrdn Plc, "we can expect a recovery toward the end of the year or early next year as the economy comes toward the end of the de-stocking cycle and as we see more coordinated policy efforts to tackle the weak economy."

Regaining international investment is currently proving to be challenging. Global funds decreased their exposure to China to its lowest point since 2020 in September after selling Chinese shares on a net basis for the second consecutive month. According to the most recent Bank of America Corp. monthly survey, "short China equities" emerged as one of the largest convictions among money managers.

"We have economic data reflecting improvement, so that's a good start, but investors are wary given how confidence was badly damaged," said Daniel Wong, FX strategist at Oversea-Chinese Banking Corp. in Singapore. He continued that it will take time for the Chinese markets to rebound because "sentiment needs to recover and confidence needs to be repaired."