Investors from abrdn to BNP Paribas Asset Management remain concerned that Beijing isn’t doing enough to boost corporate profitability as more Covid outbreaks raise the specter of lockdowns. An earlier market rebound has petered out even after authorities slashed borrowing costs, threw a lifeline to embattled developers and unleashed measures to shore up spending.

“Visibility over the evolution of China’s zero-Covid policy is low and recent messaging has suggested virus containment remains a top policy priority of the country,” said Adam Montanaro, investment director of global emerging markets equities at abrdn. “Not only do investors hate uncertainty, but the negative economic impact of this policy are increasingly visible.”

China’s benchmark CSI 300 Index is trading 15% below its peak for the year as a flareup in US-China tensions has compounded their woes. China’s military said it held fresh patrols around Taiwan on Monday to “fight back” against another US congressional visit less than two weeks after House Speaker Nancy Pelosi traveled to Taipei. Beijing claims the island as its territory.

READ: US Lawmakers Visit Taiwan After Pelosi Trip Infuriates China (1)

Market sentiment is weak because Chinese investors “are fearful that war with the U.S. could break out and new variants of Covid will result in additional restrictions,” said Mark Mobius, co-founder of Mobius Capital Partners. Chinese stocks would only recover when Beijing has addressed these two concerns, he added.

Global funds are heading for the exit. Overseas investors pulled a net 21 billion yuan ($3.1 billion) from onshore equities in July in the first monthly outflow since March, data compiled by Bloomberg show. Sentiment remains weak in August, with the market recording net withdrawals in six of the past 12 trading sessions.

The mood is so dismal that even a surprise interest-rate cut by the People’s Bank of China on Monday failed to lift sentiment. Both the CSI 300 Index and the Hang Seng Index ended lower, with the two gauges having fallen about 15% each so far this year.

“The biggest near-term risk to Chinese growth is its dynamic Covid-zero policy, which is offsetting the positive effects of Beijing’s cautious policy easing,” said Jessica Tea, senior investment specialist for Greater China equities at BNP Paribas Asset Management. “China would need to see further fiscal stimulus in order to help stabilize its GDP growth, and ultimately restore more confidence in the market.”

The measures include reviving the housing sector and accelerating state-led infrastructure investment, she added.

The consensus 12-month earnings forecast for the Hang Seng China Enterprises Index has fallen to the lowest since 2009, according to data compiled by Bloomberg. Of the MSCI China Index companies that have announced second-quarter results, at least a third of them missed analysts’ estimates.

“The trend in corporate profits has been truly awful,” said Gary Dugan, chief executive at the Global CIO Office in Singapore. “The early signs in August have been of some stabilization with trade holding up well, however the ongoing problems in the real estate sector remain worrisome.”

Valuation Argument

The MSCI China Index is trading at 11 times forward earnings, 17% below its five-year average.

To be sure, the cheap valuations have attracted some bargain hunters.

“We have been selectively adding to positions where valuations are excessively discounted, and have increased our exposure to China internet where fundamentals are improving,” said abrdn’s Montanaro.

Jian Shi Cortesi, investment director at GAM Investment Management in Zurich, said she sees the renewable sector as the bright spot in the China stock market.

A slowdown in China’s property sector has morphed into a full-blown crisis as a liquidity crunch, sparked by government efforts to curb leverage, fueled record levels of defaults. Chinese authorities are said to have told several developers that state-owned credit support provider China Bond Insurance Co. will give full guarantees for some of their upcoming onshore bond offerings.

The turmoil in the property market is bad news for the economy as it’s expected to force the central bank to rein in its stimulus to boost growth.

“The market remains concerned about the downward economic pressure from the dynamic zero Covid policy and weakness in the property market,” GAM’s Cortesi said.