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Bear Market Looms for China’s Equity Benchmark During Volatility

CSI 300 Index teetered on the edge of a bear market as the media called for investors to hold their nerves in a global selloff.

Bear Market Looms for China’s Equity Benchmark During Volatility
A man takes a photo of the Beijing Stock Exchange in Beijing, China. [Photographer: Andrea Verdelli/Bloomberg]

China’s benchmark CSI 300 Index teetered on the edge of a bear market as the nation’s state media called for investors to hold their nerves in a global selloff.   

The gauge fluctuated before closing higher on Wednesday, following a slump in the previous session that pushed it within striking distance of a 20% plunge from a February peak. Chinese stocks enjoy policy support and with looser liquidity conditions expected, corrections are buying opportunities, according to reports from at least two state-backed newspapers. 

With Lunar New Year holidays next week and China hosting the Winter Olympics, the calls are indications of Beijing’s desire for stability as traders rushed to lock in profits. The CSI 300 Index was among the few global stock indexes that didn’t plunge into a bear market during the pandemic. 

Chinese stocks have been battered along with other markets this year as traders position for U.S. rate hikes, though an increasing number of banks and money managers have turned bullish on China as it starts to ease polices.    

Bear Market Looms for China’s Equity Benchmark During Volatility

Much like 2021, tech and property sectors have been among the hardest hit in the recent selloff, with a shift away from last year’s winners adding to market swings. The last time the gauge entered a bear market was in 2018, when investor concerns about China’s trade war with the U.S. took a toll on equities. 

The positive local media reports suggest “regulators are worried about Fed-induced volatility seeping into domestic markets, especially since they are already embarking on an easing path,” said Marvin Chen, a strategist at Bloomberg Intelligence. “Liquidity conditions tend to be more volatile around the lunar new year holidays, I think we can see some stabilization after new year as easing measures kick in.”

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The CSI 300 Index closed 0.7% higher after earlier declining to just a few points away from bear market levels. The sub-gaugues for industrials and utilities were among the top gainers while healthcare stocks dropped the most.

“We think recent market moves are an overreaction of sentiment, especially given the volatility overseas,” said Chen Shi, a fund manager at Shanghai Jade Stone Investment Management Co. “This kind of fear is the best kind of buying opportunity for us.” 

China’s securities regulator vowed measures to ensure market stability earlier this month. Its central bank also plans to offer more support for the slowing economy, with policymakers cutting key interest rates in recent weeks. 

That has prompted some bullish calls. Deutsche Bank AG’s international private banking unit last week upgraded China A-shares and H-shares to overweight from neutral, betting that the diverging policy paths between the Federal Reserve and the People’s Bank of China will benefit the Asian nation’s economy and stocks.

Bear Market Looms for China’s Equity Benchmark During Volatility

Earlier this month, Jefferies Financial Group Inc. strategists turned bullish on Chinese stocks, saying they’re due for a rebound after getting hammered by a year of regulatory crackdowns and a slowing economy.

“Overall, a sense of caution prevails,” said Wai Ho Leong, a strategist at Modular Asset Management. This reflects “increased wariness given that we are entering a period of thinner liquidity over the Lunar New Year. There is also a desire for more clarity over the policy response to perceived property default risks,” he said.   

©2022 Bloomberg L.P.