How Did China’s Stock Market Lose $38 Trillion to the US? The Alarming Gap That’s Shaking Global Markets

The market capitalization of China’s stock market has reached a historic $38 trillion deficit compared to the United States, marking an alarming gap as losses persist in what seems like an unrelenting equity downturn. Data compiled by Bloomberg reveals the staggering difference, emphasizing the challenges faced by the world’s second-largest economy.

Market analysts are closely observing the situation, with Michael Liang, Chief Investment Officer at Foundation Asset Management HK Ltd, noting, “China offers value, but catalysts are just not there. Meanwhile, the US market has momentum and the economy on its side.”

The widening gap underscores a troubling global sentiment toward China’s financial landscape, where losses have exceeded $6.3 trillion in market value since the peak in February 2021. In stark contrast, US equities have seen a gain of approximately $5.3 trillion over the same period, reaching record highs. The surge in US stocks has been fueled by a megacap technology rally, coupled with optimism that the Federal Reserve will implement interest rate cuts in response to a potentially soft economic landing.

The prolonged selloff in Chinese stocks has prompted concerns about Beijing’s ability to revive an economy grappling with deflation and a persistent property crisis. What initially seemed like a performance-driven investor exodus now carries the risk of transforming into a structural shift, driven by doubts surrounding Beijing’s long-term economic strategy and the escalating strategic competition with the United States.

Bloomberg strategists, including Kumar Gautam, expressed their insights in a note, acknowledging that while China’s correction may appear extensive, “our simulations suggest the pain can continue.” They estimated a 51% probability of the MSCI China Index trading below its peak for an average duration of 35 months.

Despite the prolonged downturn, some investors anticipate a potential technical rebound, citing attractive valuations as Chinese equities become increasingly affordable. The MSCI China Index is now 60% cheaper than the US equity benchmark based on earnings-based valuations, according to data compiled by Bloomberg.

MSCI Inc.’s primary gauge for Chinese equities is currently trading at approximately eight times the 12-month forward estimated earnings, while the equivalent metric for the S&P 500 Index stands at 20 times. This stark valuation difference has caught the attention of market participants, leading some to consider the possibility of a sudden rebound.

However, the challenging start to 2024 continues for Chinese equities, with a key gauge of Chinese stocks listed in Hong Kong experiencing a 13% loss less than a month into the new year, solidifying its position as the worst-performing major global benchmark index.

As global investors navigate the uncertainties surrounding China’s economic trajectory, the widening gap between the market capitalization of Chinese and US stocks signals a pivotal moment in the evolving landscape of global equities.