China’s stock market trails U.S. by $38 trillion in unprecedented divergence

In a relentless equity downturn, China’s stock market lags behind the US by an unprecedented $38 trillion, marking a historic divergence. Amidst a $6.3 trillion loss in Chinese market value since February 2021, the US hits record highs fuelled by a tech rally and optimism about Federal Reserve actions. Doubts about Beijing’s long-term economic agenda and strategic competition with the US intensify, hinting at a potential structural shift. Bloomberg strategists predict a prolonged downturn with a 51% probability of the MSCI China Index trading below its peak.

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By Abhishek Vishnoi

The value of China’s stock market has never been this far behind that of the US, as the losses continue to pile up in a seemingly relentless equity rout.  

The market capitalization of the US stock market is now $38 trillion greater than that of Hong Kong and China put together, a fresh record, according to data compiled by Bloomberg.    

“China offers value, but catalysts are just not there,” said Michael Liang, chief investment officer at Foundation Asset Management HK Ltd. “Meanwhile, the US market has momentum and economy on its side.”

The growing divergence comes as steep losses paint a troubling picture of global investor sentiment toward the world’s No. 2 economy. At the same time, US stocks have hit record highs, powered by a megacap technology rally amid optimism that the Federal Reserve will cut interest rates this year and navigate a soft economic landing. 

Chinese stocks have lost more than $6.3 trillion in market value from a peak in February 2021. Over the same period, US equities have gained some $5.3 trillion.

Investors have been underwhelmed by Beijing’s efforts to revive a economy struggling with deflation and an ongoing property crisis. But what began as a performance-driven exodus now risks becoming a structural shift due to doubts over Beijing’s long-term economic agenda and strategic competition with the US.

Bloomberg strategists including Kumar Gautam wrote in a note that while China’s correction may seem overdone, “our simulations suggest the pain can continue.” They estimated there’s a 51% probability of the MSCI China Index trading below its peak for an average of 35 months.

On one hand, the rout has run for so long that some investors see potential for a technical rebound, given valuations are now cheap. The selloff has made the MSCI China Index 60% cheaper than the US equity benchmark on earnings-based valuations, according to data compiled by Bloomberg. 

MSCI Inc.’s key gauge for Chinese equities is trading at about eight times of 12-month forward estimated earnings, while the same metric for the S&P 500 Index stands at 20 times.

For now however, there’s little end in sight to the dismal start to 2024 for Chinese equities. Less than a month into the new year, a gauge of Chinese stocks listed in Hong Kong has already lost 13%, making it the worst-performing major benchmark global index. 

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© 2024 Bloomberg L.P.

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