Hong Kong’s stock market entered a bear market on Friday, down 21% from its highs near the beginning of the year, as investors grew worried that worsening conditions in China’s property sector could spill over to the wider economy.
The downturn in the Hang Seng Index, which is made up mostly of mainland companies, comes as China’s economy faces slowing growth. After three years of severe COVID-19 restrictions, foreign investment has declined, consumer spending has fallen, and the housing market is in turmoil.
Hang Seng fell just over 2% on Friday and about 6% for the week. The index has fallen more than 10% so far this month.
A bear market, in which stocks fall at least 20% from recent highs, is a relatively rare sign that investors are seriously pessimistic about the economy.
The real estate crisis is at the heart of China’s concerns. Among the hardest-hit companies in recent times is Chinese property giant Country Garden, whose shares are well below $1. Hong Kong dollar. Another giant property developer, China Evergrande, filed for bankruptcy protection in the United States on Thursday as it struggles to settle with creditors over tens of billions of dollars in debt.
Chinese stocks rallied after authorities in December lifted the government’s extreme “zero-corona” measures, which have severely curbed economic activity. But hopes of a sustained recovery in the Chinese economy have vanished as the country released a series of worrying economic data. Prices fell and the threat of deflation increased. Retail sales and industrial production fell short of economists’ expectations. And real estate investment has also declined.
Exports, the cornerstone of the Chinese economy, declined. China’s currency, the yuan, has fallen to its lowest level in years. Many big banks cut their 2023 China economic growth forecasts to below the government’s target of about 5%. The latest official figures show that China was growing at around 3% annual growth.
Chinese policymakers responded with a series of measures aimed at encouraging consumers to spend more and banks to lend more. The central bank, the People’s Bank of China, has cut key interest rates to new lows. But these moves have done little to boost investor confidence or generate greater economic activity.
One of the problems weighing heavily on China is the debt of local governments, which are particularly dependent on the property market. China’s total debt is now larger than that of the United States relative to the country’s economic output.
And the stock market lost momentum. In Hong Kong, stocks fell for the sixth day in a row and eight days in the last 10 trading sessions.
Stocks in mainland China also fell. The CSI 300 index, which tracks the largest companies listed in Shanghai and Shenzhen, is down about 10% from its January highs.