Hang Seng, Shanghai index collapse is causing havoc in China

Chinese equities are lagging behind their global peers leading to panic and havoc in Beijing and across the country. In Hong Kong, the Hang Seng index has plunged to $H 15,200, its lowest point since October 2022. It has crashed by over 50% from its pandemic high, meaning that investors have lost over half of their investments.

China A50 vs Hang Seng index

Chinese stocks are plunging

The same situation is happening in mainland China, where the closely watched China A50 and Shanghai Composite indices have been in a freefall as well. China A50, which tracks 50 big companies, has dropped to $11,000. In all, Chinese equities have lost over a trillion of value in the past few years.

The challenge for Chinese citizens and investors is that there is nowhere to hide as the stock market implodes. For one, the real estate industry where most people invested their money for long has imploded. Companies like Country Garden and Evergrande are on their deathbed. 

At the same time, house prices have been in a freefall. Data shows that China dropped by 10% in 2023. The challenge is that there are over 60 million vacant houses in China while the ongoing economic slowdown is affecting demand. Couple this with the fact that China’s population has continued to fall.

You've probably heard Chinese stocks are cheap. This chart takes that to a whole new level.

The Hang Seng Index's P/E is now below the Nasdaq's P/B. Those two valuation ratios should not even be anywhere close one another.

Pretty wild. pic.twitter.com/3jjYksSdOw

— David Ingles (@DavidInglesTV) January 18, 2024

China investors panic

The slump in the Shanghai Composite, Hang Seng, and China A50 is leading to panic among investors, who have continued selling their shares. At the same time, the number of hedge and mutual funds closures in the country has surged.

According to Bloomberg, 240 local mutual funds were liquidated in 2023, the biggest increase since 2018. 15 funds have already been liquidated this year and analysts expect the trend to continue. These funds are closing because of weak performance and tougher regulations in Beijing.

The panic has also hit Beijing. This week, it was reported that China asked some investors not to sell stocks. And on Friday, Citic Securities – China’s biggest broker – stopped offering shorting solutions. Shorting allows investors to borrow shares and then buy back when the price dips. 

Bans on short-selling rarely work as we saw in 2015 when China banned the practice. In the aftermath, stocks continued crashing. Most recently, KOSPI index jumped after South Korea banned short-selling. It has now resumed its decline.

The key challenge for China is that its relations with Western countries is not improving and there are signs that the country will invade Taiwan in the coming years. As a result, many foreign investors have dumped Chinese equities and shifted to other countries like India and the US.

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