Sinking profits turn China's $3.5 trillion stock rout into a deeper trap

China's stock market witnessed a significant decline, with the value of its equities market plummeting US$3.5 trillion from its May peak, according to Bloomberg data. The sell-off intensified last week, pushing the onshore benchmark CSI 300 Index into a bear market and a tech sector gauge in Hong Kong toward erasing all its gains since Beijing's growth support package two years ago.

Investors are increasingly concerned about the sustainability of China's economy, which is growing but at a slower pace. Chinese leaders appear hesitant to launch a major stimulus package, citing concerns over profitability and the need to avoid further fiscal discipline. Three quarters of members in the MSCI China Index have seen their 2026 earnings forecasts decline by over 4%, with profit projections for the MSCI China constituents dropping more than 13% since March.

Companies such as CATL, a leading battery manufacturer, and Ganfeng Lithium Group Co, a key lithium producer, have reported earnings that missed estimates, highlighting the impact of fierce competition and margin pressure. The weak corporate earnings across various industries, from banks to electric carmakers and AI developers, have contributed to investor losses.

Despite the market downturn, some investors remain cautiously optimistic about Chinese stocks, attributing the decline to liquidity rather than low valuations and expecting increased inflows due to favorable policies. However, skepticism persists about the long-term prospects, as policymakers continue to adopt a cautious approach to stimulus measures.