According to a report from The Wall Street Journal, "Chinese stocks are off to a bleak start in 2014, falling for the third straight session Monday and wiping out gains built up late last year in a burst of investor euphoria for the country's reform plans".
"The Hang Seng China Enterprises Index, which tracks mainland shares listed in Hong Kong, fell 1.4% Monday, touching levels not seen since stocks surged in the wake of China's Third Plenum , a November meeting of top Communist Party leaders that produced a reform course for the country that was more ambitious than expected. In the mainland market—which is largely closed to outside investors and showed a more muted reaction to the country's reform measures--the Shanghai Composite fell 1.8% Monday".
Strategists said a year-end cash crunch on the mainland—the latest in a series of squeezes since June—as well as slowing activity in China's manufacturing and service sectors last month was responsible for the selling. Investors are also girding for a series of important data points on China's economy to be released this week, including trade data and inflation figures.
"The market is reflecting the reality that growth is going to be slower this year," said Erwin Sanft, head of Hong Kong and China equities strategy for Standard Chartered in Hong Kong. "The positive parts of the reform package are going to be felt incrementally over the next few years, whereas the impact on growth is immediate."
Sentiment on Chinese stocks sharply improved in the final weeks of 2013 after Communist Party leaders said they would reform the country's state-owned enterprises, open up its capital markets and loosen its one-child policy, among other plans. Investment banks, such as Goldman Sachs Group Inc., took a more bullish stance on the country in response, advising investors to increase their allocation of Chinese stocks. Monday, GS addressed its upgrade in a note to clients.
"Admittedly, our upgrade has been challenged by several recent developments," the firm wrote, noting the year-end cash crunch and weaker manufacturing and service-sector data last week.
"We stand by our view that the fundamental and reform-driven upside in China continues to look attractive, although these developments have tempered, but not overturned, our tactical return expectations for China," the firm said.
