It’s officially a bear market for the Hong Kong Stock Exchange. On Thursday August 20th, the Hang Seng Index closed down 1.7% to 22,757. This meant that the index was down more than 20% from its April 27th high of 28,588—officially entering a bear market.
Despite the recent tumble, the Hang Seng Index was only down 1.2% year-to-date due to the strong bull market run earlier this year. However, as we can see from the stock chart, the index dropped to way below its 200-day moving average. Whether the previous upward trend could continue remains questionable.
The 20% drop in the Hong Kong stocks really shouldn’t come as a surprise given the size of the stock market crash in mainland China. Since June 12th, the Shanghai Composite Index plunged a dramatic 32%.
Chart courtesy of www.StockCharts.com
If you look into it, the plunging stock price is actually quite easy to understand. The economy in China is slowing down. It used to be the manufacturer of the world with exports being the main driver of its economic growth, but growth from exports was disappearing.
In July, China’s exports fell 8.9% year-over-year to 1.19 trillion yuan. Imports fell an equally large 8.6% to 930 billion yuan.
With the world economy slowing down, foreign demand has been weak and the country is seeking growth from its domestic demand. However, as the weak import numbers suggest, demand within the country was yet to pick up.
To make matters worse, on Friday, Markit reported that the Caixin Flash China General Manufacturing PMI fell to 47.1 in August, hitting a 77-month low. Note that in July, the final Caixin China PMI was already at a two-year low of 47.8. The continuing drop in August suggests that the worst is yet to come for China’s shrinking manufacturing sector. (Source: Markit, August 21, 2015.)
As expected, the sell-off continued in China’s stock markets on Friday: the Shanghai Composite Index plunged another 4.3%, while the Hang Seng Index dropped 1.5%. With no sign of fundamental improvement in sight, the future of China’s stock market looks rather worrying.