Chinese Stocks Near Correction as Rally Fades on Weak Economy

(Bloomberg) — Chinese stocks in Hong Kong neared key bearish technical levels on Tuesday as fading tech gains and renewed economic growth concerns fueled a sharp selloff.

The Hang Seng China Enterprises Index (^HSCE) slid 1.8% and the MSCI China Index fell 1.6% Tuesday, with both briefly entering technical correction. Alibaba Group Holding Ltd. (BABA, 9988.HK) and Tencent Holdings Ltd. (0700.HK, TCEHY) were among the worst drags, while a gauge of tech stocks traded in Hong Kong was just shy of a bear market.

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The recent pullback has threatened to undermine fragile investor confidence in the world’s second-largest market, weighed by persistent economic weakness and Beijing’s reluctance to unveil sweeping stimulus. Fresh data showing further deterioration in economic confidence this week has amplified concerns and raised the risk of a spillover into other assets.

“Deflation, soft consumption, real estate weakness, involution — none of these issues seem to have been definitively resolved,” said Vey-Sern Ling, managing director at Union Bancaire Privee, adding that profit-taking makes sense given uncertainty.

Investors are now reassessing their positioning in China’s equity market after a DeepSeek-fueled surge earlier this year turned local gauges into global standouts. Concerns over stretched valuations in tech and broader benchmarks coupled with fading hopes for sweeping stimulus by Beijing, are quickly eroding confidence.

That fragility was on display Monday after data showed Chinese investment slumping further and retail sales growing at their weakest pace since Covid, sending markets reeling. Home prices have resumed declines, renewing worries over China’s prolonged real estate crisis amid China Vanke Co.’s deepening debt woes. Persistent trade tensions are compounding the economy’s vulnerability.

Meanwhile, President Xi Jinping has vowed to crack down on the pursuit of “reckless” projects that have no purpose except showing superficial results, highlighting the Chinese leader’s concern over the quality of growth in gross domestic product and the use of financial resources.

Worries over an artificial intelligence bubble are affecting the tech sector, along with “generally weak macro and lack of meaningful catalysts from the Central Economic Work Conference,” said Xin-Yao Ng, a fund manager at Aberdeen Investments, referring to the economic policy meeting earlier this month.

The market pause has spurred a shift away from pricier tech shares and into areas expected to gain from Beijing’s policy support to boost domestic demand. Such a rotation has helped onshore stocks outperform their offshore peers, with the CSI 300 Index down 2.8% over the one-month period compared with a 6.8% drop in the HSCEI.

The MSCI China gauge, which tracks shares listed on the mainland and in Hong Kong, is trading at about 12 times forward earnings, above its five-year average of 11 times.

Some global fund mangers, including Amundi SA and Fidelity International, say Chinese stocks could advance next year given the country’s AI prowess and resilience amid US tensions. The MSCI China Index is still up nearly 27% this year, beating gains in the regional benchmark and almost doubling the climb in the S&P 500.

Still, profit taking in high-flying names, such as Pop Mart International Group Ltd., has added pressure to China’s domestic markets.

“China stocks have lost momentum in the fourth quarter due to a lack of catalysts and underwhelming signals on policy support,” said Marvin Chen, a strategist at Bloomberg Intelligence. “China stocks may continue to take signals from global sentiment until early next year, when key policy meetings kick off.”

—With assistance from Lin Zhu and Charlotte Yang.

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