Chinese small-cap stocks suffer market rout as Trump threatens renewed trade war

By Joseph Adinolfi

Large-caps finished higher as traders bet on more National Team support for biggest companies, China expert says

Chinese stocks suffered another rout on Monday, with a gauge of small-cap stocks trading on the mainland slumping nearly 9% at its lows, as former U.S. President Trump threatened a renewed trade war should he win re-election in November.

China The 1000 index CN:512100, a gauge of small-cap stocks, finished down 6.2% at 4293.07. Although the index finished off its lows of the session it still marked the lowest close since at least mid-2019, according to FactSet data. The index has fallen more than 27% year-to-date, FactSet data show.

The rebound occurred after local authorities pledged more efforts to support the country's struggling stock market, including taking steps to mitigate risks stemming from shares pledged as collateral by China's mom-and-pop traders, according to a Bloomberg News report.

The country's stocks are entering their fourth straight year of losses, according to the performance of the iShares China Large-Cap ETF FXI. The ETF, which trades during U.S. market hours, is down nearly 11% so far this year through Friday's close, FactSet data show.

Chinese large-cap stocks did just fine on Monday, with China's CSI 300 ASHR index rising 0.7% to 3,200.42, while the Hang Seng Index HK:HSI, the stock-market benchmark for Hong Kong, fell just 0.2% to 15,510.

China's Shenzhen Composite CN:399106, which features shares of many up-and-coming companies in China's technology sector, slumped 3.9% to 8,205.07, its lowest level since February 2019, FactSet data show.

Jason Hsu, chief investment officer at Rayliant Global Advisors, told MarketWatch via email that large-cap Chinese stocks benefited at the expense of small-caps as investors bet on China's so-called national team moving to support the country's largest stocks.

Outside this group of the largest state-owned enterprises, market breadth was "very negative," Hsu said.

"This is in part driven by the National Team committing to invest aggressively in the mega caps to support the market index. This announcement has since pulled away all liquidity from the smaller cap and non state-owned enterprise stocks, as investors flock to what the national team is buying to benefit from the government put," Hsu added.

China's National Team is a group of state-backed investors sometimes called upon by Beijing to pour money into the country's market to try to stanch outflows during a selloff.

Chinese stocks have struggled alongside the country's economy since reopening following the harsh lockdowns during the COVID-19 pandemic. A historic crisis in China's property sector has also contributed to the country's economic woes, as has a spike in youth unemployment. Meanwhile, threats from former U.S. President Donald Trump to slap 60% tariffs on all Chinese-made goods have heightened concerns about a renewed trade war between the world's two largest economies.

According to Bloomberg data, Chinese and Hong Kong-traded shares have erased $7 trillion in value since their market peak in early 2021.

The situation with China's stock market has gotten so dire that thousands of locals flocked to an unexpected place - a post by the U.S. Embassy in Beijing on China's Weibo social-media platform - to complain about the situation, according to a report in The Wall Street Journal.

See: India is winning over investors as Chinese stocks struggle, these charts show

-Joseph Adinolfi

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02-05-24 0958ET

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