What should investors know about Chinese stock market crisis?

The Chinese stock market collapse has significantly impacted foreign institutional investors, who considered China a key investment hub. The real estate crisis, slow growth, deflation, and demographic headwinds have worsened the outlook of the Chinese market.

The recent uptick in the Shanghai Shenzhen CSI 300 index is insufficient to offset losses incurred over the past year, with the Shanghai Shenzhen CSI 300 index down over 17% and CSI 1000 down over 27%. The recent gains in the indices came after Beijing took steps to stop the stock rout.

China is facing challenges such as real estate woes, slow growth, deflation, and demographic headwinds. The Chinese market’s underperformance has been stark for years, with the Shanghai Composite Index below that level and the Nifty multiplying more than four times during 14 years.

Chinese stocks are unlikely to attract large flows, which is a clear positive point for other neighboring markets. After the fall, Chinese indices are trading at a very cheap valuation.

If Beijing communicates change in its attitude towards internet companies and shows signs of mending its broader economic woes, many active value investors may choose to put some money fresh money in China and pull out some from rival stock markets, though there has not been any sustainable sign of this happening.

The Chinese economy is going through difficult times with sharply slowing growth, rising unemployment, and the real estate market in serious crisis.

If significant emerging market funds continue to pull out, China’s equity risk could prolong stagnation.