Chinese stocks were supposed to ride the artificial intelligence wave. Instead, they are like a runner who fell behind at the starting gun while rivals sprinted ahead. The MSCI China Index - a measure of the country's largest stocks - has underperformed the global MSCI World Index by the widest margin since just after the September 11 attacks in 2001.
China missed the big tech boom that lifted markets in South Korea, Taiwan, and Japan. Those three countries gained between 17% and 99% in their benchmark indices this year. Why?
They make the hardware and chips that power artificial intelligence. China does not have major hardware manufacturers that benefit from this wave.
"From a technology point of view, the Chinese equity market today doesn't have the very significant beneficiaries of AI capex that South Korea and Taiwanese equity markets have," said Sam Konrad, a portfolio manager at Jupiter Asset Management in Singapore. In Paris, Kevin Net, who heads Asian equity investments at Financiere de l'Echiquier, explained that his firm steers clear of offshore Chinese stocks due to their focus on consumption and Internet rather than AI. He prefers onshore stocks listed in Shanghai or Shenzhen that play on AI, industrials, and metals.
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Behind the stock slide is a slowing Chinese economy. Consumer spending is falling. Last month saw the first drop in retail sales since the pandemic began.
Home prices are falling, and fixed-asset investment is shrinking. "We expect second-quarter GDP growth to slide to around 4.4% this year, which is under the official full-year growth goal," stated Larry Hu, Macquarie Group's head of China economics based in Hong Kong. He warned that if exports stay strong because of the global AI boom, the government may not roll out major stimulus to boost domestic demand.
That means consumer spending could stay weak.
"Chinese equities have been a major drag on our portfolio year-to-date," said Gerald Gan, chief investment officer at Reed Capital. "We have the likes of Tencent and Alibaba, but they are underperforming badly." Chauwei Yak, CEO at GAO Capital Pte in Singapore, said he is "quite sad" because he owns Alibaba. "It's extra sad that the only worse country is Indonesia. China is so high-tech and yet the only country it can beat is a relatively lower tech country with a lot more problems."
The government has also cracked down on cross-border capital flows. Three brokerages - Futu Holdings, Tiger Brokers, and Long Bridge Securities - were fined a total of $330 million for illegal capital outflows. That has hurt market sentiment, especially in Hong Kong. The Hang Seng Index's performance relative to the global MSCI All-Country World Index has fallen to its lowest level since 1990 - when China's economy was only 2% of its current size.
"Since the crackdown on cross-border illegal trading, the pressure on the Hong Kong indices is palpable," said Hao Hong, chief investment officer at hedge fund Lotus Asset Management Ltd. "Without participation by mainland money, the upcoming IPOs will test how liquidity conditions really are in Hong Kong." Despite the gloom, Hong Kong has raised almost $44 billion through IPOs and other stock sales this year, up 29% from last year. But that money may come from outside China.
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