china stock market graph

Will Chinese Stocks Come Back? Two Reasons Suggest Yes

By:Thomas Westwater

Outflows pick up but FXI stocks might be ready to rebound

  • Chinese stocks have been heavily sold recently.
  • Government data released this week shows heavy outflows.
  • Are bulls ready to pounce as selling pressure eases?

It hasn’t been a great couple of months for Chinese equity markets. In August, Chinese stocks—measured by FXI, the iShares China Large-Cap ETF—fell 9.93%, the largest monthly percent decline since February, and trumped the 1.77% decline in the U.S. S&P 500 Index. And while September’s losses aren’t as bad, investors are still fleeing the Chinese market, with FXI down about 1.5% this month.

What is causing Chinese outflows?

China’s economy has lost its luster amid faltering economic growth. For decades, Beijing has enjoyed a sharp growth trajectory fueled by a hungry global consumer base and a large Chinese workforce able to produce those goods at next-to-nothing costs. Since the 1980s, when China started westernizing its markets, the gross domestic product per person grew ten-fold.

For a while, China was widely expected to eclipse the mighty U.S. economic machine—at some point in the coming decades. Now, a growing chorus of analysts see a slower-growing China. A China that might not ever catch up. While different, it’s a story the world has heard in Japan during the Cold War era.

There are numerous things to blame for China’s slowdown, from mismanaged policy decisions to a deglobalization effort fueled by Western protectionism. While the country’s property crisis has receded due to government measures, structural problems are a harder issue to tackle. The path forward for China looks much different. And it seems like investors are acutely aware of that. Beijing may ramp up stimulus measures, which have so far been modest, but that is not likely to bring back double-digit growth.

Are Chinese stocks set to rebound?

Chinese stocks may be set for a dead cat bounce, if nothing else, following intense selling pressure. Government data released this week showed that capital and financial outflows totaled $48.9 billion in August, the biggest amount in nearly 10 years. The Yuan saw outflows of about $30 billion. These numbers suggest that investors are still not keen to invest in China despite recent government measures to support the property market and tax cuts.

Looking at price action, we see that selling has slowed. This could hint that the current wave is exhausted. That said, ardent China bulls may see this as an opportunity to start or add to a position. Still, headwinds remain, and volatility is always around the corner. Earlier this week, BlackRock strategists downgraded Chinese stocks, citing growth concerns, according to a Bloomberg report.

The Fed plays a role in directing Chinese investment

The yield premium offered by Treasuries is sapping capital away from China; and it looks like that premium may continue after today’s Federal Open Market Committee meeting. Across the curve, U.S. bonds are offering hefty premiums against their Chinese counterparts. For example, the 20-year Treasury’s premium is at 1.52%. These types of spreads influence where investors put their capital, especially considering the economic potential of the U.S. The chart below demonstrates the market behavior between the aforementioned yield spread and the FXI ETF.

us cn vs fxi

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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