Xi Jinping’s belated stimulus has reset the mood in Chinese markets

Some 3trn yuan in fiscal spending for bank recapitalisation, consumer handouts and local-government refinancing has been reported but not announced formally. (Image: Pixabay)
Some 3trn yuan in fiscal spending for bank recapitalisation, consumer handouts and local-government refinancing has been reported but not announced formally. (Image: Pixabay)

Summary

  • But can the buying frenzy last?

If Chinese retail investors had their way they would forgo the seven-day National Day holiday that ends on October 7th. An aggressive stimulus package, announced in Beijing on September 24th, has unleashed the biggest stockmarket rally the country has witnessed in more than 15 years. Major indices have soared more than 25%; the Shanghai stock exchange has suffered glitches under the volume of buying activity. The prospect of halting for a full week has made netizens anxious: “We must keep trading; we must cancel National Day," one young investor screamed into a video widely shared on WeChat, a social-media platform.

The package, unveiled by top regulators, included a policy-rate cut, mortgage-rate cuts and 800bn yuan ($114bn) in support of the stockmarket. Two days later a meeting of the Politburo, a group of China’s 24 most senior leaders, drove the point home by using phrases such as “action comes first", rather than the passive verbiage repeated in recent years. At another high-level meeting on September 29th Li Qiang, China’s premier, pledged to speed up the implementation of easing measures.

Some 3trn yuan in fiscal spending for bank recapitalisation, consumer handouts and local-government refinancing has been reported but not announced formally. Debate over the effectiveness and scale of this long-awaited bail-out has raged. But local and foreign investors agree on one crucial point: Xi Jinping, China’s supreme leader, has finally woken up to the severe problems ailing China’s economy and changed his approach to fix them.

The effect has been to instantly lift the gloom that has hung over the country after hopes of a strong post-pandemic recovery faded in mid-2023. One article circulating on September 30th told how a young retail trader made 520,000 yuan that very morning. Stock-picking tips have flooded social media even though most stocks listed in China and Hong Kong have surged. All the while investors have ignored gloomy economic news, such as data released on September 27th that showed industrial profits tumbling by almost 17%, year on year, in August. Even as ChiNext, the Shenzhen stock exchange’s main index, surged by 15% on September 30th, a survey of purchasing managers suggested that manufacturing activity continued to contract.

(The Economist)
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(The Economist)

Few companies have performed poorly enough to be left out of the rally. Although China’s securities brokers have been slammed by probes and restrictions for several years, the share price of Citic Securities, one of China’s biggest brokerages, has risen by 41% since the stimulus was announced. Shimao Group, one major developer that faced liquidation earlier this year, has more than quadrupled. Listed education firms, battered by a policy crackdown in 2021, were lifted by the news. Tech analysts wonder whether this moment marks a reset for China’s biggest internet firms, such as Alibaba and Tencent, the share prices of which have more than halved since early 2021. This revaluation of China writ large is bound to continue when trading resumes on October 8th. Just days ago the world was short on everything China-related, says Stephen Jen of Eurizon SLJ Capital, an asset manager. “Could the bingeing on Chinese equities be complete in one week?" he asks. “I doubt it."

The shift has given foreign investors whiplash. Just four days before unleashing the stimulus, the People’s Bank of China (PBOC), the central bank, declined to cut rates, causing many investors to sell down more of their Chinese holdings. And yet with indices such as the CSI 300, a key local benchmark, soaring by 25% in the five trading days after the package was announced, China’s weighting in the MSCI Emerging Markets index has risen by 3.7 percentage points. Many foreign investors who track the index will be pushed back into Chinese stocks.

The plan to prop up China’s markets comprises two novel tools. Institutional investors will be allowed to pledge stocks, exchange-traded funds (ETFs) and bonds as collateral to the central bank in exchange for up to 500bn-yuan-worth of central-government bonds. The proceeds from these must be used exclusively for buying stocks. The PBOC will also make available 300bn yuan in loans to corporate shareholders for repurchasing their own shares. Pan Gongsheng, its governor, has signalled that this could be just the first of three tranches of liquidity. Asked during a press conference whether authorities would employ a “market-stabilisation fund"—a state vehicle created solely for buying shares—Mr Pan replied that such an option was being studied.

A key question for the coming months is whether financial wonks have been given a greater role in this new policy-making cycle, and whether or not that matters. Mr Xi’s time in power has witnessed the steady sidelining of reformers and a demotion of pragmatic, pro-growth policymaking in exchange for ideology and a national-security obsession. One source of market euphoria, notes a Shanghai-based portfolio manager, is that “more decision-making power could be handed back to the technocrats".

The man overseeing the rally is Wu Qing, a veteran banker who took over the top securities regulatory job after a market crash in January and February shredded his predecessor’s career. Mr Wu has been labelled both a “firefighter" for his ability to handle disasters, and a “butcher" for harsh penalties imposed on bad actors. Many hedge-fund managers have come to view him as the latter. Regulators have often punished anyone appearing to make money from market routs. Mr Wu has overseen increasingly stringent rules for high-frequency trading and demanded higher asset thresholds for funds to operate.

It is unclear if foreign investors should take comfort from the emboldening of a senior technocrat such as Mr Wu. Rather than promote a broader range of trading tools that support liquidity and help investors hedge their bets, his tenure has seen many small funds close and foreign investors drastically draw down their exposures to China. On his watch China’s stock exchanges have stopped reporting daily cross-border investment flows.

The news and rumours of redoubled support were designed to make a big splash in markets. But the gloomy sentiment and sagging asset prices that once prevailed must be distinguished from the fundamentally poor economic indicators that continue to materialise. The authorities have bet that these factors are so tightly linked that, by breaking the downward spiral in sentiment, they will eventually prevent shares and house prices from falling, ultimately lifting the economy. By boosting asset prices they can also buoy sentiment, creating a virtuous cycle. Until September many Chinese people experienced a negative wealth effect as the value of their homes and other investments slid. Now that effect is starting to reverse.

Perhaps the biggest risk to this plan is its reliance on good vibes. It lacks solutions to China’s pressing problems, such as its property woes. Sentiment would not be lifted for long were these to persist in the background, notes Larry Hu of Macquarie, a bank. If house prices and sales keep falling, stocks should follow.

The property market is far from being fixed. Figures from a private data provider released on October 1st showed that the value of new-home sales among the 100 largest developers fell by 38% in September, year on year, from 27% in August. The government’s pitch to the people is that the downturn has bottomed out, notes Andrew Collier of GlobalSource Partners, a consultancy. This clashes with what is happening on the ground, he says, as a fundamental shift in China’s political economy is needed to solve its biggest problems.

(The Economist)
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(The Economist)

In the coming weeks there is plenty of money to be made in Chinese stocks, says one investor in Singapore who has gone all in. But if bad economic data continues to trickle in over the course of the year, China risks yet another monumental market sell-off. That, the investor notes, could spoil sentiment well into 2025. It would also make further attempts at market rescues a rather hard sell.

© 2024, The Economist Newspaper Ltd. All rights reserved. 

From The Economist, published under licence. The original content can be found on www.economist.com

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