Chinese stocks listed in Shanghai and Hong Kong have never been cheaper. Here’s why

The fate of mostly Chinese companies represented on the Hang Seng Index in Hong Kong is far worse.

Their average price-to-book value stood at 0.85 times on Wednesday, near the record-low of 0.82 times reported in October 2022. The measure peaked at 1.56 times in April 2015, according to Bloomberg data.

“The derating of the valuations of Chinese equities has been a big drag on performance,” said Nicholas Yeo, the Hong Kong-based head of China equities at abrdn, which manages assets worth US$467 billion globally. That is largely due to the economy being not great, he added.

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At the same time, perceptions, especially outside China, have been pretty negative, Yeo said.

The Shanghai Composite Index tracks all 2,158 companies listed on the bourse, with a total market capitalisation of 42.9 trillion yuan (US$6 trillion). The Index has declined 4.3 per cent so far this year to approach its lowest level seen in March 2020, before the Covid-19 pandemic took hold. This follows losses of 3.7 per cent in 2023 and 15.1 per cent in 2022, with more than 5 trillion yuan in capitalisation erased in this losing streak.

Sentiment has taken a blow this month after a set of government data showed China’s economy continued to struggle throughout 2023, with deflationary pressure persisting and gross domestic product growth trailing market consensus. Meanwhile, the Chinese central bank has unexpectedly held rates steady this week, dashing hopes that Beijing will inject liquidity to help the struggling economy.

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Offshore investors have sold more than 26 billion yuan worth of mainland stocks so far in January, adding to the record US$26.2 billion sell-off in the previous five months, according to Stock Connect data.

“I think it’s still possible for the market to drop further under this overwhelming selling pressure,” said Jason Chan, investment strategist at Bank of East Asia. Even the widely speculated state buying might not be enough to offset this pessimism, he added.

“The main things are still geopolitics, the lack of an economic recovery and earnings, which have been going downwards rather than upwards,” Yeo said during a media briefing on Thursday.

“All these [elements] have to reverse – especially earnings have to reverse to push markets higher.”