Chinese stocks are close to erasing the Politburo's gains amid economic woes

(Bloomberg) — A Chinese stock index is close to erasing all the gains it made since a key political meeting in late July, as the economy struggles to gain momentum and optimism about stimulus wanes.

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The CSI 300 Index is down 1.3% as of the midday break after falling 3.4% last week. This move erases most of the progress recorded by the gauge after the pro-growth tone in the Politburo meeting on July 24. A measure of mainland Hong Kong-listed shares fell 2.8%.

The post-Politburo rally has been reversed by mounting signs that the recovery is losing momentum, and concern is growing that Beijing’s steps to counter the slowdown are too small, too slow. Investors have also soured about the country’s outlook due to the turbulent real estate sector, while concerns are also mounting about a credit company’s delay in paying wealth products that are maturing.

“The market sentiment is very weak and it seems that the strengthening of the Politburo was just a respite amid the pessimistic theme of the past months,” said Wang Mingli, executive director at Shanghai Youpu Investment Co.. “After a brief round of optimism, investors are once again disappointed as they realize that the policies are still not tangible enough to provide a real boost to the economy.”

The Nasdaq Chinese Golden Dragon fell 3.7% on Friday, also posting gains since the key meeting. Meanwhile, the Hang Seng is down more than 7% this month, lagging behind the MSCI Asia Pacific which lost more than 5%.

Country Garden Holdings was one of the biggest losers on the Hong Kong scale, after it fell 17% to a record low. A crisis is brewing at the company, once China’s largest real estate developer, after its units halted trading in domestic bonds and shares plummeted after Morgan Stanley’s downgrade.

Other Chinese assets also came under pressure. The offshore yuan fell towards its lowest levels in the year, even after the central bank ramped up support for the currency with a stronger-than-expected peg.

“There really is a massive wall of anxiety for the China bulls,” said Derek Tay, head of investments at Kamet Capital Partners Pte, and foreign investors continue to sell. “A lot of cracks are emerging, no less than the credit risk, from Country Garden’s latest earnings warnings.”

Foreign investors, who snapped wild Chinese stocks for two weeks after the Politburo meeting, sold off every day last week, withdrawing a net 25.5 billion yuan ($3.5 billion). That was the most in any week since October. The outflows continued on Monday as global funds withdrew 2.4 billion yuan as of the midday holiday.

Global multinationals are becoming “less optimistic” about China in the second quarter of 2023 as measured by macro, consumption, employment and cost, according to Morgan Stanley’s AlphaWise Global MNC China Index. It was the first time since late 2021 that sentiment has gone bad on all four counts, strategists including Laura Wang wrote in a note.

(Updates with MSCI China in last paragraph)

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