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It has been quite a topsy-turvy 2022 for Chinese equities so far. What are the key factors that have contributed to the volatility?

Even though we are only in the third quarter, it already feels like a long time given the number of key events that have taken place so far. This is particularly true for Chinese equities, which started off the year well but were then weighed down by regulatory tightening across sectors such as property, technology and private education.

Things quickly took a turn for the worse as the war in Ukraine prompted huge selling across most risk assets globally. Ongoing tensions with the US also put pressure on Chinese equities but two areas specifically felt the most impact. One is the potential delisting of Chinese companies listed on US stock exchanges if they do not take steps to comply with certain accounting rules established by the US Securities and Exchange Commission. Secondly, Chinese biopharmaceutical and drug companies experienced a sharp sell-off after the US Food and Drug Administration declined approval of select China-tested drugs. These factors have inevitably increased the risk premium associated with Chinese equities.

Yet before we could even take a breather, China has found itself battling another wave of COVID-19 since late first quarter. The country’s zero covid policy and the subsequent implementation of citywide lockdowns generated a lot of uncertainties because of their debilitating impact on supply chains and economic activities. Top government officials have already said the country is keeping its growth targets for the year flexible after seeing its economy grew only by 0.4% year-on-year in the second quarter. The bigger fear is whether a slowdown in China could potentially find its way into the global economy given the country’s sheer size and prominence when it comes to driving global growth.

Chinese equities did experience a strong rally from late April to late June due to increasing efforts to loosen policies and support the economy. But it remains to be seen whether China will enter “full-stimulus” mode as policies so far have been fairly targeted and that has contributed to the lingering sense of uncertainty especially when it comes to sectors that have borne the brunt of the volatility. The key issue here is the government’s zero COVID-19 policy. Pandemic-related restrictions are slowing the velocity of money within the Chinese economy so there is little point for Beijing to go full-throttle when it comes to stimulus measures now.

 

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