China Had Worst Performing Stock Market of 2018 – What Happened?

A trade dispute with the US and a crackdown on shadow banking made China the world’s worst-performing major stock market in 2018, shedding some $2.3tn in value.

Investors say that while China’s intensifying trade war with the US grabbed much of the attention, a government campaign against leverage in the financial system played a big role in slowing market demand and forcing some funds into liquidation.

China’s benchmark CSI 300 index will finish the year close to 3,000, down more than 25 per cent from where it started 2018, according to Bloomberg data. The staggering drop outpaced other poor performers: Japan’s Nikkei 225 dropped 14 per cent, the US S&P 500 was down 8 per cent and the UK’s FTSE 100 fell 13 per cent.

Worries surrounding the impact of the US trade war with China still loom large over markets ahead of the New Year. However, comments from both the US and Chinese presidents over the weekend praising “positive progress” in talks could boost markets that reopen on Monday after a choppy Christmas week.

Hong Kong’s Hang Seng climbed 1.3 per cent in Monday’s shortened session but still ended the year down 14 per cent, its worst year since 2011 when it fell by a fifth.

US President Donald Trump, who agreed to postpone his planned January increase of China tariffs at a G20 meeting early this month, said on Saturday that talks with Chinese counterpart Xi Jinping were “moving along very well”.

Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management, said: “The Chinese stock market has experienced volatility over the year and seems to be pricing in an economic hard landing since June 2018 when the trade war concerns intensified.”

Liquidity in the Chinese market tightened this year, following a regulatory crackdown aimed at combating a years-long build up in leverage in the financial system. Those reforms have focused largely on so-called shadow banking, which before the clampdown saw lenders channel a significant sum of money to fund managers that then invested it in Chinese stocks.

“The banks cannot deploy funds to unqualified third parties including select asset managers and those funds have been forced to sell off to in order to get liquidity,” said Alexious Lee, head of China capital access at brokerage and investment group CLSA.

Regulators did not deploy a significant state-backed effort to stabilise Chinese stocks, however, in contrast to China’s market boom and bust in 2015.

“This time around the regulators have been very disciplined and allowed market mechanisms to play a bigger role in price determination, especially during the MSCI inclusion,” said Mr Lee.

China’s slowing economy is another factor to worry markets. Beijing reported its economy grew 6.5 per cent in the third quarter of the year, its slowest quarterly figure in almost a decade. The trade dispute is also expected to take a toll on Chinese manufacturing, one of the main growth engines.

Additional reporting by Emma Dunkley in Hong Kong

Article source: https://www.ft.com/content/50e3e97a-0a86-11e9-9fe8-acdb36967cfc

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