China and Hong Kong Stocks Slump as Economic Gloom Spreads

About three weeks ago, at a meeting chaired by Xi Jinping, China’s leader, officials acknowledged that China’s economy was facing “new difficulties and challenges.”

According to the official Xinhua News Agency’s summary of the Politburo meeting, officials promised to juice the economy, which had started to rebound at the start of the year after Covid restrictions were lifted but had been struggling. The economic troubles, they said, arose from flagging domestic demand and a “grim and complex” global economy, among other factors.

Chinese stocks jumped at the time, even though officials laid out only vague plans, like using “countercyclical” regulations, adjusting policies for the troubled real estate sector, and prodding people to buy cars, electronics and household goods.

Since then, China has released a string of worrying economic data. Prices consumers and business pay are falling, raising the threat of deflation. Retail sales and industrial production in July missed economists’ expectations, and investment in real estate is plunging.

As a result, the stock market has lost its fizz.

An index of Chinese stocks traded in Hong Kong has fallen more than 9 percent this month. The benchmark for stocks that trade in Hong Kong, the Hang Seng Index, is down a similar amount. Among its members, the laggard is the beleaguered Chinese real estate firm Country Garden, which has lost about half its value this month.

A stock index called the CSI 300, which tracks the biggest companies listed in Shanghai and Shenzhen, has dropped about 5 percent.

“The Chinese economy is faced with an imminent downward spiral with the worst yet to come,” analysts at the investment bank Nomura wrote in a report on Tuesday. “Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand.”

Indeed, the People’s Bank of China, the nation’s central bank, has cut key interest rates to new lows. But critics say that the moves have not been bold enough. Wednesday brought more distressing data: Home prices had fallen in 49 of 70 major cities in the country.

The central bank, analysts at Barclays said on Tuesday, would soon lower the amount of reserves banks need to hold, in a bid to stimulate the economy. Barclays cut its forecast for economic growth in China this year to 4.5 percent, from 4.9 percent. Next year would bring even slower growth, the analysts said, with output expanding at 4 percent.

The Barclays analysts said that the two biggest issues Beijing needed to address were the housing market and domestic spending, which has been hampered by rising unemployment, particularly among young people. On Tuesday, China said it would stop releasing data on youth unemployment, which was at a record high of 21.3 percent.

“The real estate sector remains a big drag on the economic recovery,” the analysts wrote, adding that a bounce in domestic demand had “stalled amid rising unemployment.”