(Nov 22): A selloff in Chinese stocks deepened on Friday afternoon, as disappointing tech earnings hurt sentiment already weakened by concerns over Donald Trump’s imminent return.
  
The mainland benchmark CSI 300 Index slumped 3.1%, the most since Oct 9. The Hang Seng China Enterprises Index of Chinese stocks traded in Hong Kong lost 2.1%, capping a second straight week of losses. A gauge of Chinese tech stocks in Hong Kong tumbled into a technical bear market. 

The retreat extends the market’s slide since an October peak, underscoring growing frustration over the pace of Beijing’s fiscal stimulus rollout and jitters over a potential escalation in US-China tensions. The disappointing earnings from consumption bellwether PDD Holdings Inc and online search company Baidu Inc have further dented confidence, with the latter’s shares briefly plunging 10% in Hong Kong following a decline in revenue. 

Traders also pointed to statement by Texas governor Greg Abbott dated Nov 21, which prohibited state agencies from putting new money into investments originating from China and urged a divestment of previous holdings. That worsened fears that some of the largest US funds may avoid investing in China as part of political considerations. 

The statement from Texas has affected “sentiment especially when the market is lacking momentum,” said Steven Leung, an executive director at UOB Kay Hian Hong Kong. Investors have also “found nothing has improved from property and equity to consumption — also no positive surprise from corporate earnings".

Traders have looked to Chinese tech earnings to regain confidence over the economy’s trajectory, only to face the harsh reality of anemic consumer spending. Baidu Inc recorded its biggest revenue drop in more than two years. PDD warned that its profitability will trend downwards over time because of intensifying competition in its home market of China. 

The Hang Seng Tech Index fell 2.6% on Friday, taking its decline from an October high to over 20%. 

The market’s outlook has been under debate after a massive rally in late September, driven by monetary easing, lost momentum. Wall Street analysts including those at Morgan Stanley and CLSA have recently trimmed their recommendation on Chinese stocks. Some, however, have said a selloff will be an opportunity to add positions as Beijing likely has enough policy tools to counter US president-elect’s tariff proposals.  

There are signs that the stimulus so far has stabilised the economy. Retail sales exceeded forecasts in October. While industrial production increased at a slightly slower pace from the previous month but hovered above a level critical to achieving the government’s 2024 growth target of around 5%. 

Yet the rising uncertainties mean the market will see increased volatility heading into 2025.

“The broader market is still facing uncertainties around macro, because better October numbers were partly boosted by early Singles’ Day promotions on the retail side and timing around policy easing on the property side, so there are some questions around sustainability,” said Xin-Yao Ng, an investment manager at abrdn plc. “Regarding tariffs, I think Trump will start to negotiate with various governments, but the appointees to the government are many China hawks, so not great.”

The Hang Seng China gauge has now lost 17% since its October peak. The CSI 300 Index is down more than 9%.

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