Why is China's Economy Slowing?

What’s the background? The CSI 300 Index is a stock market index that consists of 300 of the largest listed stocks on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). It’s important because Investors and Economists use it as a benchmark for the performance of Chinese equities.

What’s happening?

The CSI 300 Index has declined ~20% over the past year and is trading near 2019 lows. Representing ~$7 trillion in value lost over the last three years. This has led to Chinese officials being forced to step in and ‘stabilize its markets’.

China has attempted multiple forms of stimulus, as well as, implementing trading restrictions, such as:

• Limiting investors’ ability to short Hong Kong stocks, as well as some investors being told they’re not allowed to sell their positions

• Certain quant funds are being banned from placing sell orders and cutting leveraged positions

Also to note: Evergrande and Deflation.

Evergrande. 

Evergrande was the second-largest Chinese real-estate developer until they amassed $300 billion in debt (1.5% of China’s GDP) they couldn’t pay back. On Jan. 28th, 2024, Evergrande, the world’s most indebted real estate developer, was ordered to undergo liquidation.

Deflation. 

While much of the world battles inflation, China is battling deflation. China just reported its fourth consecutive monthly decline in its Consumer Price Index (CPI) report. Weak consumer demand has been weighing on prices.

China’s economy is slowing.

How does this affect you? As you can see below, Chinese and U.S. markets have historically had a strong correlation with each other. That is until 2023.

Orange: S&P 500 , Blue: CSI 300

The disconnect between U.S. equities and Chinese equities is mind-boggling. China’s equity markets are currently fighting for their life, while U.S. equity markets are at all-time highs.

Something has to give…