Is the Chinese Market Finally Bottoming Out?

The Chinese stock market has been hovering at low levels for a long time, with the performance of Hong Kong stocks particularly dismal. The Hang Seng Index fell by 12% in 2021, followed by declines of 13% and 10% in 2022 and 2023, respectively. The bear market in 2021 and 2022 was somewhat expected, but last year, with the economy reopening at the start of the year, investors were generally optimistic. However, the market continued to fall. Whenever positive news seemed to emerge, signalling a turning point, it was followed by another wave of declines, each lower than the last.

At its core, stock investment is a matter of confidence. The main culprit behind the dismal performance of the Chinese market is the lack of investor confidence. Therefore, good news is often ignored, no news is interpreted as bad news, and bad news triggers indiscriminate selling.

Without an increase in confidence, the stock market will struggle to see a meaningful rebound. Fortunately, signs of a bottoming out of confidence seem to have emerged.

Firstly, with concerns about earnings dissipating, market sentiment has significantly improved.

Major earnings estimate downgrade was one of the main causes for the sluggish performance of Chinese stocks last year. The initial enthusiasm surrounding the reopening in early 2023 led to ambitious growth expectations for companies. However, weak economic recovery and subdued demand after the second quarter undermined companies’ profitability, as they had to constantly adjust their business strategies, significantly increasing the difficulty of inventory management and cost control.

Despite initial consensus estimates of mid-teens earnings growth for the MSCI China Index in 2023, this figure was slashed to mid-to-high-single digit by year-end. In fact, the actual growth was even lower than the revised estimate. Yet, as investors had already factored in the worst-case scenario, the realization of tepid results didn’t exacerbate market sentiment. Instead, attention shifted towards prospects of a 2024 economic recovery after the result season.

While aggregated demand may remain weak this year, visibility in the macroeconomic environment has improved compared to 2023, allowing companies to set relatively realistic sales targets in a more certain economic environment, which generally bodes well for earnings growth.

Secondly, recent improvements in some economic data boosted the confidence of many overseas institutions, prompting them to upgrade their forecasts for China’s growth this year. Goldman Sachs raised its 2024 GDP forecast from 4.8% to 5%, while Morgan Stanley also revised up its figure from 4.2% to 4.8%.

In fact, not all economic data were showing improvement, but GDP and consumption indicators significantly exceeded expectations. GDP grew by 5.3% year-on-year in the first quarter. While the real estate sector continued to lag, exports demonstrated strong resilience. Consumer potential is also gradually being unleashed, with 1.19 billion trips taken during this year’s Qingming Festival holiday. More importantly, the average spending per trip increased compared to 2019 levels, marking the first time this data has surpassed pre-pandemic levels since the economic reopening. Considering that short trips have become more popular now, the increase in average spending further indicates an increase in household consumption willingness.

Thirdly, foreign investors are beginning to reconsider China. Due to factors such as the pandemic lockdown, the real estate crisis, and the regulatory crackdown on platform companies, foreign capital has been flowing out of China in recent years. In 2023, while emerging markets overall saw inflows of foreign investment, $82.2 billion worth of Chinese stocks and bonds were sold. However, there are signs of a recent reshaping of foreign investor confidence. We have witnessed a significant increase in the number of foreign investors at recent investment summits. Additionally, last year, when faced with relatively positive company earnings guidance, their initial reaction was skepticism. While it cannot be said that they are fully embracing it now, it is clear that they are searching for reasons to reallocate to China. This change is attributed to extremely low valuations, but also to increased confidence resulting from the improving economic data. Over the past month, the level of buying from our institutional clients has reached a level not seen in the past year. From this perspective, market sentiment seems to be changing.

Overall, the Chinese stock market has experienced too many instances in the past two years where it seemed like dawn was approaching, only to fall back into darkness. Whether this time it will truly recover remains to be seen, and subsequent economic data and external risks need to be closely monitored. However, the momentum of change appears to be approaching a pivotal point.


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

In respect of any discrepancy between the English and Chinese version, the English version shall prevail.