(Bloomberg) -- An intensifying rout in stocks has made China the world’s worst-performing major market in the new year, and a weak economy and lack of potent stimulus suggest investor confidence is far from recovering.

The benchmark CSI 300 Index has lost nearly 7% so far in 2024, following a record three consecutive years of losses. The Shanghai Composite Index, which is popular among China’s local investors, fell below the key 2,800 psychological level to its lowest since April 2020 on Thursday.

A confluence of factors have been behind the seemingly endless selloff, ranging from a deepening housing slump to stubborn deflationary pressures, as well as disappointment with Beijing’s reluctance to use aggressive monetary and fiscal measures to revive growth. Uncertainties about the trajectory of US interest rates, the threat of an imminent blowout of local stock derivatives and concerns about tighter regulatory oversight have added to the pessimism.

Here’s a list of headwinds facing Chinese shares:

Economic Woes

While China managed to achieve its official growth target last year, the economy’s mixed performance in December elicited fresh concerns about its prospects. The latest data showed the country recording its worst deflationary streak since the Asian Financial Crisis, with home prices falling by the most since 2015.

Policymakers’ unwillingness to dust off an old playbook of deploying another credit binge to stimulate growth is also weakening investors’ appetite for Chinese stocks. At the World Economic Forum in Davos this week, Chinese Premier Li Qiang gave his clearest signal yet that Beijing won’t seek short-term growth while accumulating long-term risk.

READ: China Downplays Big Stimulus in 2024, Testing Investor Patience

Fed Uncertainty

An almost daily recalibration by markets of the timing and pace of the Federal Reserve’s shift toward policy easing, following a historic monetary tightening campaign, is a universal challenge that also affects Chinese equities.

The impact is more pronounced on Chinese stocks listed in Hong Kong, which are more sensitive to the Fed’s outlook given the city’s open economy and currency peg to the US dollar. The Hang Seng China Enterprises Index is down 11% this year, the worst performer among more than 90 global equities indexes tracked by Bloomberg. 

The US central bank’s policy trajectory also carries implications for Chinese assets as a whole, given the wide interest-rate gap between the two nations. 

“Snowball” Knock-in Risks

As China’s stock rout exacerbates, pressure is building on a massive amount of snowball derivatives, which are structured products that promise bond-like coupons as long as the underlying assets trade within a certain range. 

The relentless selloff has heightened the risk of those derivatives hitting levels that trigger losses. An estimated 110 billion yuan ($15.3 billion) of such products have almost all hit the so-called knock-in price levels that would lead to forced selling, according to a Thursday report by CITIC Futures Co.

READ: China ‘Snowball’ Derivatives Worth $13 Billion Near Loss Levels

Regulatory Overhang

A recent speech by President Xi Jinping on making China a ‘financial power’ has rekindled worries among some investors that authorities will further tighten scrutiny of the country’s financial industry and capital market.

Xi urged for Chinese and overseas markets to become more connected, though he stressed that the opening of the domestic financial industry should be carefully managed. China’s financial sector development is fundamentally different from the Western model, he added.

“The market’s interpretation is that financial market oversight will be strengthened in the near term,” Huaan Securities Co. analysts wrote in a recent note.

--With assistance from Shikhar Balwani.

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