China’s Troubles Rattle Global Stocks and Drag Hong Kong Into Bear Market

Stocks in Hong Kong entered a bear market on Friday, down 21 percent from their high near the start of the year, as investors around the world grew increasingly worried that the deteriorating condition of China’s real estate sector could spill over into the broader economy.

The slump in the Hang Seng Index, which is made up mostly of companies from the mainland, comes as China’s economy confronts weakening growth. After three years of harsh Covid restrictions, foreign investment is down, consumers are spending less and the housing market is in turmoil.

Bear markets, when stocks drop at least 20 percent from their most recent peak, are a relatively rare signal that investors view the economy with serious pessimism. The Hang Seng fell just over 2 percent on Friday, and about 6 percent for the week. The index is down more than 10 percent so far this month.

Global investors are also wary of the effects of China’s weakening economy, which has added to worries about inflation and high interest rates in Europe and the United States. On Friday, European stocks were down throughout the day and the S&P 500 lost about half a percent in early trading. The U.S. benchmark index is on track to record its third consecutive weekly decline.

“Markets are being hit by the perfect storm,” analysts at Barclays wrote in a report on Friday, citing rising interest rates, grim economic data in China and other factors.

A real estate crisis is at the heart of the concerns over China. Among the companies hit hardest recently is the Chinese real estate giant Country Garden, whose shares are trading well below one Hong Kong dollar. Another behemoth property developer, China Evergrande, sought bankruptcy protection in the United States on Thursday as it struggled to settle with creditors over tens of billions of dollars in debt.

Highlighting the depths of the downturn, Soho China, a Hong Kong-listed developer of office buildings in mainland China, on Friday reported a plunge in first-half profit of more than 90 percent. The company said in a statement that “the domestic and global business environment was still full of uncertainty” and “market confidence was yet to be restored.”

Chinese stocks had bounced after officials in December lifted the government’s extreme “zero Covid” measures that sharply curtailed economic activity. But hopes that China’s economy would show a sustained recovery faded as the country released a string of concerning economic statistics. Prices fell, raising the threat of deflation; retail sales and industrial production missed economists’ expectations; and real estate investments dwindled.

Exports, a cornerstone of China’s economy, have fallen. China’s currency, the renminbi, has sunk to its lowest level in years. A number of major banks have downgraded their forecasts for how much China’s economy will grow in 2023, to levels below the government’s target of about 5 percent. The most recent official numbers indicate that China was growing at an annual growth rate of about 3 percent.

China’s policymakers have responded with a series of measures aimed at encouraging consumers to spend more and banks to step up their lending. The central bank, the People’s Bank of China, has cut key interest rates to new lows, while securities regulators have proposed ways to make trading stocks cheaper and easier. But the moves have done little to boost the confidence of investors or generate greater economy activity.

One problem weighing heavily on China is debt, particularly at local governments that depend greatly on the real estate market. Overall debt in China is now larger, relative to national economic output, than in the United States.

And so the stock market has lost steam. In Hong Kong, stocks have declined for six consecutive days, and eight of the past 10 trading sessions.

Stocks have also tumbled in mainland China. The CSI 300 index, which tracks the biggest companies listed in Shanghai and Shenzhen, has dropped about 10 percent since its January high.

The situation for investors is brighter in the United States, where the S&P 500 index, even after recent declines, is up about 14 percent this year, buoyed by optimism about technology — especially the prospects for artificial intelligence, and the chip makers that power those applications — and the resilience of consumer spending.

Still, the benchmark index has shed about 5 percent of its value this month, chipping away at the gains recorded in recent months. “The U.S. economy remains strong, while China continues disappointing at the margin and global investors are becoming increasingly concerned,” Claudio Irigoyen, an economist at Bank of America, wrote in a report. This “decoupling” could eventually “contaminate sentiment” enough to trigger a sharper fall in global markets, he added.

J. Edward Moreno contributed reporting.