China equities enter bear market as CSI 300 extends sell-off

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CSI 300 enters bear market

Highlights

The CSI 300 has fallen 2.6% this week, marking a 10th consecutive weekly decline and confirming a 20% drop from its June peak into bear market territory.
Chinese equities face sustained weakness due to structural challenges, with corporate earnings outlook clouded by excess capacity and overinvestment in key sectors like batteries.
China posted its weakest industrial profit growth of 2023 in September and saw the slowest economic growth in over three years in Q2 amid ongoing property and consumer weakness.

Benchmark decline reflects deeper market stress

As reported by CNBC, the CSI 300, which tracks 300 of the largest stocks listed in Shanghai and Shenzhen, has dropped 2.6% so far this week, with LSEG data showing the index has now declined for 10 consecutive weeks.

The move into bear-market territory adds to signs of sustained weakness across Chinese equities as investors assess the outlook for corporate earnings and broader economic growth. A 20% fall from the June peak is widely seen by markets as a marker of a bear market.

Jordan Cvetanovski, chairman and chief investment officer at Pella Funds, says China’s equity market continues to face structural challenges as the world’s second-largest economy grapples with the fallout from years of excess capacity and overinvestment. He points to pressures facing companies even in globally competitive industries such as batteries, although he still sees selective opportunities in that sector.

Profit pressure and slower growth weigh on outlook

Chinese companies are contending with declining profit growth amid intense competition that is eroding margins and prompting government intervention in some areas.

In September, China posted its weakest growth in industrial profits this year, adding to concern about the durability of the recovery. The economy also records its slowest growth in more than three years in the second quarter, with activity pressured by a multiyear property-sector slowdown and extended weakness in consumer demand.

In our earlier article on China’s third-quarter growth outlook and fresh stimulus measures, we noted that economists expected only a modest pickup as policymakers rolled out targeted rate cuts, mortgage support, and additional debt quotas. The report stressed that stronger exports and factory output were offsetting weak domestic demand, while property-sector strains and subdued consumption continued to cap the recovery and keep growth near the lower end of official targets.

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