Since the Russian invasion of Ukraine, global capital markets have taken a plunge
China A-shares have followed a similar trend, declining sharply and heading into bear market territory. A-shares fell mostly due to uncertainty and risk aversion, not because they are in a downtrend. Instead, the time is coming that investors added more A-shares in their asset allocation.
Chinese Stocks Enter a Period of Risk Aversion
Since January, China A-shares have retraced. This is firstly due to an expected fall in U.S. stocks as a result of the Fed increasing interest rates. Secondly, successive defaults of Chinese real-estate enterprises cast doubts over the Central Bank’s “loose credit policy”. Shares also tumbled with the drop in consumption and the halted operations of businesses in affected areas due to the sporadic COVID-19 outbreaks during the Chinese New Year. By February it seemed as if the stock market had bottomed out as reports came in that total social financing in January had increased to RMB 6.17 trillion. However, on February 24th the Russia-Ukraine war started to escalate, causing China A-shares to follow the declining trend in U.S. stocks. This led to a jittery and risk-averse Chinese stock market.
Stock markets did not anticipate the situation between Russia and Ukraine, which has caused a market sell-off as investors seek to hedge risk. Moreover, A-shares suffered from various investor structural problems, such as a shortage of institutional investors and industrial mutual funds. Also, due to fund rankings and margin pressure, reducing a position to assess the situation is often the first reaction in a time of uncertainty. It may trigger a short squeeze. After a two-day rebound following the fall, it became clear that the war in Ukraine would last longer than anticipated. Subsequently, investors cut their positions further to hedge the risk.
The continuation of the Russia-Ukraine conflict has far exceeded initial expectations, but its influence on China is limited. Currently, market insight into the situation is somewhat insufficient. The situation involving various complex geopolitical issues is very complicated, which cannot be resolved in the short term. In terms of trade volume, the situation has limited effect on China since Russia and Ukraine only account for 3% of China’s exports. However, Europe and the United States make up 30% of China’s exports, a number that the Chinese market will be more concerned about. This is in addition to other concerns such as insufficient easing of policies in the property sector, the negative impact of high prices on consumer spending, a slowing economic growth, and declining A-shares due to risk-aversion.
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