Is This A Turning Point for the Chinese Economy?
In late September, China experienced an unprecedented stock market rally, the largest in over 15 years, triggered by an aggressive stimulus package unveiled by the government on September 24th. The surge has left Chinese retail investors both ecstatic and restless, with many lamenting the National Day holiday, which runs until October 7th, as it would pause trading just as markets reached a fever pitch. "We must keep trading; we must cancel National Day," one young investor’s video plea went viral on the social media platform WeChat, reflecting the widespread sentiment of retail traders eager to continue profiting from the stock surge.
The stimulus package, announced by top regulators, included a significant policy-rate cut, cuts in mortgage rates, and an injection of 800 billion yuan ($114 billion) into the stock market. This was followed by an announcement from China’s Politburo, a group comprising the country's 24 most senior leaders, emphasizing action over passive policy measures, further reinforcing the government’s intention to stimulate growth. On September 29th, Chinese Premier Li Qiang reiterated the government’s commitment to accelerating the implementation of these policies.
Though the formal announcement of additional fiscal measures, such as 2 trillion yuan in consumer handouts and local government refinancing, and 1 trillion yuan to recapitalize banks, has not yet been made, discussions about the scale of this bailout are ongoing. One thing, however, is clear: both domestic and foreign investors recognize that Xi Jinping, China’s supreme leader, has shifted his stance and is now taking significant steps to address China’s economic woes.
Euphoria Sweeps Chinese Markets, But Risks Remain
The immediate effect of this shift was to lift the gloom that had overshadowed China’s economic outlook. Hopes for a strong post-pandemic recovery had faded by mid-2023, but this new approach reinvigorated markets. Social media was flooded with stock-picking tips, and stories of traders making quick fortunes spread rapidly. For instance, one widely circulated article on September 30th detailed how a young retail investor earned 520,000 yuan in just one morning. Despite this euphoria, investors largely overlooked economic warning signs, such as a 17% year-on-year decline in industrial profits for August, and a purchasing managers' survey indicating continued contraction in manufacturing.
Almost all companies saw their stock prices rise, with few left behind. Citic Securities, one of China’s largest brokerage firms, saw its share price double despite having been under regulatory scrutiny for several years. Even Shimao Group, a major real estate developer facing liquidation earlier this year, more than quadrupled in value. The enthusiasm has even reached education companies and tech giants such as Alibaba and Tencent, whose stock prices had more than halved since 2021.
As trading resumes on October 8th, the revaluation of China’s stock market is expected to continue. "Just days ago the world was short on everything China-related," remarked Stephen Jen of Eurizon SLJ Capital, an asset management firm, in a comment that reflects the sudden reversal of sentiment among investors. However, he cautioned that the surge in Chinese equities may not be a short-term phenomenon, indicating the potential for further gains in the weeks ahead.
Foreign Investors Scramble to Re-enter China
This dramatic turnaround has left foreign investors surprised. Just days before the stimulus was introduced, the People's Bank of China (PBoC) chose not to cut rates, causing many international investors to sell off Chinese holdings. But with key indices such as the CSI 300 soaring by 25% in the five trading days following the stimulus, China’s weighting in the MSCI Emerging Markets index has increased by 3.7 percentage points. This shift is expected to compel foreign investors tracking the index to reinvest in Chinese stocks.
The stimulus plan introduces two innovative tools. First, institutional investors can pledge stocks, ETFs, and bonds as collateral to the central bank in exchange for up to 500 billion yuan in government bonds and central bank bills, with the proceeds earmarked for stock purchases. Second, the PBoC will provide 300 billion yuan in loans to corporations for stock buybacks. The PBoC Governor, Pan Gongsheng, hinted that this might be just the first of three tranches of liquidity. During a press conference, Pan suggested that a "market-stabilization fund"—a state vehicle designed to buy shares—was under consideration.
The resurgence of market optimism raises an important question: Have financial technocrats been given more influence in this new policy direction? If so, what impact will this have on China’s broader economic strategy? Under Xi’s leadership, reformers have been increasingly sidelined, with ideology and national security taking precedence over pragmatic, growth-oriented policymaking. However, a Shanghai-based portfolio manager pointed out that the current optimism could stem from the belief that "more decision-making power could be handed back to the technocrats."
Wu Qing's Leadership
At the center of this market rally is Wu Qing, China’s top securities regulator, who took office after a market crash earlier in the year led to the downfall of his predecessor. Known as both a "firefighter" for his crisis-management skills and a "butcher" for his harsh regulatory measures, Wu is a divisive figure. Hedge fund managers are wary of his tough stance, especially as short-sellers and high-frequency traders have faced increasing restrictions. Under Wu’s leadership, China’s stock exchanges have even stopped reporting daily cross-border investment flows, contributing to a decline in foreign investor confidence.
The government's attempt to buoy market sentiment could be effective in the short term. But China’s fundamental economic challenges, especially in the real estate sector, remain unresolved. The latest data showed that new-home sales among the country’s top 100 developers fell by 38% year-on-year in September, following a 27% decline in August. Andrew Collier of GlobalSource Partners notes that the government's narrative that the economic downturn has bottomed out contrasts with the reality on the ground.
Short-Term Gains vs. Long-Term Risks
In the weeks ahead, investors may continue to reap profits from Chinese stocks. However, if poor economic data persists throughout the year, China risks another large-scale sell-off, which could spoil market sentiment well into 2025. As one Singapore-based investor cautioned, any further efforts to rescue the market might be harder to sell if underlying economic problems remain unaddressed.
Ultimately, while the short-term stock market surge reflects the power of sentiment, the long-term stability of China's economy depends on addressing the structural issues at its core. If these problems are left unresolved, the current euphoria may quickly fade, leaving both domestic and international investors bracing for yet another downturn.
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