China's US$3.5 Trillion Stock Rout Deepens

Weakening corporate profits are threatening to prolong a selloff in Chinese equities that has wiped about US$3.5 trillion off the market since a peak in May, The Edge Malaysia reported on Sunday, citing Bloomberg data.

The rout pushed the onshore CSI 300 Index into a bear market last week, while a Hong Kong technology gauge is moving towards erasing all of its gains since Beijing’s sweeping growth-support package two years ago, according to the report.

Earnings fall short of forecasts

Consensus 2026 earnings forecasts for members of the MSCI China Index have been cut by more than 4% since the end of March, and profit projections for the Hang Seng Tech Index have fallen by more than 13% over the same period, The Edge and Investing.com reported.

MSCI China constituents that have released third-quarter results so far have missed consensus estimates by an average of 9%, the second-worst quarterly shortfall in two years, according to Bloomberg calculations cited in both reports.

Battery maker CATL’s profit miss was described in the report as a sign of both weak demand and fierce competition, while Ganfeng Lithium fell short of estimates on falling prices. China Mobile’s net profit for January to September dropped 8% from a year earlier, and Alibaba’s US$10 billion follow-on share sale diluted existing shareholders, the reports said.

The slide comes even as China’s economy grew 4.5% year on year in the third quarter, bringing growth for the first nine months back within the government’s 4.5%-5% annual goal. Market turnover is near its lowest since July last year, and outstanding margin trading has fallen to its lowest level in a year.

Investors split on outlook

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said “it is too early to conclude that the worst is over.” He said profitability is his biggest concern, as China’s strength in production and exports is not consistently turning into domestic demand, pricing power or earnings.

Jason Lemire, chief investment officer at Bold Wealth Partners, pointed to CATL as the clearest example, saying competition in China is encouraged, often harsh and not friendly to shareholders. Stanley Tang, senior portfolio manager at Sumitomo Mitsui DS Asset Management, said he would favour companies in Japan, South Korea and Taiwan over Chinese firms for better earnings, and sees little that China can do to lift share prices.

Bridgewater Associates’ China arm has taken a more positive view, turning cautiously optimistic on local stocks. It said the third-quarter declines were largely driven by liquidity and that valuations are not high, the report said.

What’s next on stock rout

State funds, known as the national team, have been mobilised to stop share prices from spiralling, but the report said this rescue may only be a temporary fix, with the third-quarter reporting season off to a disappointing start.

William Bratton, head of cash equity research for Asia Pacific at BNP Paribas, said policymakers are comfortable with the nature of economic growth and see no urgency for fiscal measures to drive large-scale consumption. Investors will be watching upcoming corporate results, changes in profit forecasts and any new measures to boost household consumption, Lapaas Voice reported.

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