Hong Kong CNN Business  — 

The recent turbulence in US stock markets pales in comparison with China’s dismal 2018.

While the Dow and other major US indexes have plunged in recent weeks, the sell-off in China started much earlier and has been uglier.

The benchmark Shanghai Composite slumped into a bear market — a 20% fall from a recent high — in June. And things have gone further downhill since then. Hong Kong’s Hang Seng, which is packed with big Chinese companies, followed Shanghai into bear territory in September.

China-focused investors have had plenty of bad news to contend with this year, including the country’s economic slowdown and the trade war with the United States. China’s economy is also laden down with debt and facing concerns about a real estate bubble and the stability of its currency.

A trade truce agreed by US President Donald Trump and Chinese leader Xi Jinping on December 1 has done little to calm either country’s markets. The Dow has dropped about 10% since early December, and the Shanghai Composite more than 5%.

The losses on Wall Street have been particularly steep because investors in the United States are concerned about the pace at which the Federal Reserve is raising interest rates and the possibility of an economic downturn next year.

Investors in China have less to worry about on that front.

Economists expect Beijing to resort to more stimulus next year as signs mount that growth will weaken further in the coming quarters.

This year, the Chinese government cut taxes and reduced how much cash banks have to hold in reserve in an attempt to prop up growth. More of the same in 2019 could support company earnings and stocks prices, analysts predict.

Discount to the Dow

Chinese stocks look cheap compared with those on Wall Street. Following the big sell-off this year, the Shanghai Composite is trading at an almost 40% discount to the Dow, according to a common valuation metric used by investors.

“Following the correction in 2018, we believe risk-reward has turned exceptionally favorable for Chinese equities,” said Mike Shiao, a fund manager at investment firm Invesco, in a note to clients.

There’s another factor weighing on Chinese stocks, though.

Big Chinese companies often pledge their stock as collateral in return for loans from brokers. If brokers start worrying about the companies’ ability to pay back loans, they offload their stock, according to Diana Choyleva, chief economist at research firm Enodo Economics. That happened in a big way earlier this year, intensifying losses in the market.

Up to 15% of Chinese stocks have been pledged in this way, Choyleva estimates.

“China’s equity market is currently in the throes of a pledged-shares meltdown,” she said.