The collapse of China's stock market could be a breaking point for foreign investors, said Jeremy Mark of the Atlantic Council.
The market will become more volatile as remaining investors focus on quick profits.
The country must respond to its real estate crisis to trigger a stable market recovery.
The decline in China's stock market may have scarred it in the long run, as foreign investors are unlikely to return, the report said. Atlantic Council wrote Friday.
On domestic and U.S. indices, Chinese companies have collectively suffered a $7 trillion loss since the start of 2021. The fallout could be the final breaking point for offshore traders, who are already rushing to exit amid gloomy outlook for the country's economy, said lead researcher Jeremy Mark. .
With little reason to return, China will become the focus of investors betting on quick profits rather than stable growth.
“Investing in China will likely become the domain of bargain hunters and foreign hedge funds, some of which are already active in the market,” Mark wrote, later adding: “Remaining fund managers could end up contributing to fluctuations market volatility and fortune that are part of everyday life on Chinese markets.”
Beijing has responded to financial tensions in recent weeks by adopting a series of measures intended to mitigate this sharp decline. These include state-supported purchases, as well as restrictions access to offshore markets and curb short selling.
Although this wave of effort sparked a rally this week in Chinese indexa stronger recovery will depend on how Beijing handles broader crises, Mark noted.
China's real estate market is the main concern, given that this sector accounts for around a quarter of the country's GDP. Once a rapidly growing industry, its reliance on high debt led to a massive wave of defaults, with real estate giants obliged to liquidate.
Foreign investors have been disappointed by Beijing's slow response, while the government 2020 crackdown on the tech sector provided another incentive to exit Chinese markets, Marks noted.
The stock market exodus has been largely led by passive funds, as well as investors focused on long-term growth. Net foreign capital inflows reached just $6.1 billion last year, the lowest level since 2017.
This has had a direct impact on China's startup scene, with the country's IPO market drying up as new companies seek liquidity.
“Even if the economy and the real estate market reach their lowest point in 2024, worrying signals are emerging about the government's intentions towards equity investors. In recent months, various statements to the financial markets suggest less tolerance for the status quo.” Marks said.
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