MSCI China Index enters bear market with 20% drop from October peak

The MSCI China Index fell 2.1%, entering a bear market with a 20% decline from its Oct. 2 peak, as weak retail data highlighted China's reliance on exports.

"May's data reinforced the divergence between resilient external demand and weakening domestic activity, with strong exports increasingly at odds with weak inflation and softer activity indicators," Sheana Yue, senior economist at Oxford Economics, said.

China's retail sales fell 0.6% in May from a year earlier, the first decline since December 2022, when the country was still under zero-Covid restrictions. Fixed-asset investment contracted 4.1% in the first five months of the year, widening from a 1.6% drop through April. Industrial output grew 4.5% year-over-year, supported by a nearly 20% surge in exports. Alibaba Group (9988.HK) and Tencent Holdings (0700.HK) were the largest drags on the MSCI China Index.

The selloff in Chinese equities contrasted with record highs in regional peers. South Korea's KOSPI closed up 2.25% at 9,063, while Japan's Nikkei 225 rose 1.65% to 71,053, both at all-time highs. The divergence shows how China's "two-speed" growth — export strength alongside domestic weakness — is weighing on investor appetite.

The Hang Seng Index tracked the broader selloff, with technology and e-commerce stocks bearing the brunt of the decline. The outlook for internet companies has soured because of weak earnings prospects and subdued household demand that shows no signs of a near-term recovery. Goldman Sachs maintained a buy rating on Tencent with a price target of 700 Hong Kong dollars, saying the stock's valuation has bottomed. China's consumer price index rose just 1.2% in May, trailing the producer price index's 3.9% jump, suggesting companies are struggling to pass on higher input costs to consumers.

The yuan weakened past 7.25 against the dollar as the data reinforced expectations of prolonged economic headwinds. China's 10-year government bond yield held near 2.15%, reflecting continued demand for safe-haven assets during the equity rout. The Shanghai Composite Index fell 0.11%, while the CSI 300 declined 0.3%, tracking the broader weakness across Chinese markets.

Beijing is on pace to meet its official GDP growth target of 4.5% to 5% this year, reducing the urgency for fresh stimulus. But the persistent weakness in consumer spending — worsened by the fading effects of last year's subsidy program for home appliances and electric vehicles — suggests the recovery remains fragile. Traders pointed to the lack of additional fiscal support from Beijing as a key factor behind the selloff, with the next catalyst being the Politburo meeting expected in late July.

This article is for informational purposes only and does not constitute investment advice.