On Tuesday, the Chinese stock market experienced significant declines, with the STAR 50 index dropping by 4% and other major indices also facing heavy losses. This downturn comes despite the Chinese government launching multiple measures to stabilize the market on Monday evening. Analysts widely regard the recent intervention as “superficial,” suggesting that it fails to address the underlying economic issues that hinder long-term gains in the A-share market.
The fluctuations in the Chinese stock market were particularly pronounced on November 3. By the end of the trading day, the Shanghai Composite Index was down by 0.82%, closing at 3,608.1 points. The Shenzhen Component Index declined by 1.21%, finishing at 10,876.99 points. Simultaneously, the ChiNext index fell sharply by 2.73%, closing at 2,391.65 points. The STAR 50 index, often referred to as the “barometer” or “core gathering” of the Sci-Tech Innovation Board, faced a notable dip of 4%.
In response to the deteriorating market conditions, the People’s Bank of China (PBOC), along with financial regulatory bodies including the China Securities Regulatory Commission (CSRC), introduced several measures aimed at revitalizing the market.
The PBOC announced the initiation of the third batch of securities, fund, and insurance company swap operations, which aim to increase market liquidity by lowering the costs associated with capital usage. Additionally, they reduced the interest rate on re-lending for stock buybacks from 1.25% to 1%.
On the regulatory front, the CSRC proposed easing restrictions on market stabilization buybacks and accelerating the purchase of exchange-traded funds (ETFs) to help stabilize market expectations.
These swap operations and stock buyback financing are part of the monetary policy tools introduced by the PBOC to enhance liquidity in the market, thereby reducing the costs of large shareholders’ buybacks.
The swap operations allow financial institutions to exchange their assets for high-quality assets from the PBOC, which can then be used for financing purchases of stocks. The stock buyback financing initiative enables the PBOC to extend low-cost funding to commercial banks, which should in turn provide targeted loans to listed companies and shareholders for stock repurchases or increases in holdings.
Despite these measures, they were unsuccessful in prompting a rebound in A-share prices. Reports from Singapore’s “United Morning Post” quoted the views of Shen Meng, Executive Director of Chanson Capital, and Xie Dongming, Head of Asian Macroeconomics at OCBC Bank, who described the current round of policies as “superficial” and unable to change the fundamental market concerns, potentially leading to counterproductive outcomes.
Shen Meng emphasized that the policy tools introduced do not address the core issues affecting the stock market. He articulated his position by stating, “If we only support the capital market without improving the fundamental aspects of the real economy, the market will deviate from its fundamentals.” He cautioned that this could encourage speculative short-term trading, further weakening the overall capital market and leading to a vicious cycle.
Xie Dongming added that while the PBOC’s measures aim to lower the threshold and costs for capital usage, they do not directly alleviate institutional fears regarding the decline in the stock market.
Notably, a prominent Chinese financial commentator, known by the handle “Lucaizhu,” analyzed the situation, asserting that this funding is fundamentally borrowed capital. Only through increased earnings from listed companies can stock prices rise, allowing borrowed funds to circulate effectively. If the borrowed capital is used to purchase stocks that do not perform well, leading to a decline with no buyers to support them, it raises concerns about further borrowing.
Conversely, if listed companies can demonstrate ongoing profit growth, their stock prices would naturally rise, reducing the need for such government interventions. In recent months, since the summer, the Chinese stock market has been mired in stagnation. While government-backed initiatives began to take effect in mid-October, they failed to reverse the downward trend in A-shares.
On October 19, the CSRC approved the registration of the first batch of 18 actively managed ETFs, which collectively launched on October 23, injecting new capital into the market.
According to reports from China.Table, investment bank Goldman Sachs estimated that in just two weeks of October, approximately 170 billion yuan entered selected ETFs, as the so-called “national team” (state-supported investment firms) engaged in supportive buying to curb stock market declines.
Despite these efforts, the CSI 300 index fell by 8.5% in October alone, marking the most significant monthly decline in over a decade and extending a streak of 12 consecutive weeks of losses at historic lows. Year-to-date, this index had accumulated a decline of 15%, while during the same period, the S&P 500 index experienced a rise of 10%.
Reuters reported that by late October, the STAR 50 index, including major semiconductor companies, had dropped roughly 40% from its mid-year peak, resulting in a market value evaporation of approximately $480 billion. This decline underscores the intensified pressure on the Chinese stock market, attributable to persistent stagnation in the real estate sector, weak consumer spending, and lackluster economic growth.
The Financial Times pointed out that macroeconomic issues, compounded by growing market skepticism regarding investments in artificial intelligence, represent the primary factors exerting pressure on the market. Additionally, a tax crackdown affecting offshore trusts prompted some billionaires to sell off stocks to fulfill tax obligations, further exacerbating market stress.
Sam Conrad, an investment manager at Jupiter Asset Management, remarked, “The failure of the recent policies to boost A-share prices illustrates our pessimistic view on the long-term outlook for the Chinese stock market. It indicates a reliance on government support to lift sentiment.”
He added, “Historically, the Chinese stock market has been one of the poorest performers globally. We believe that the economic system in China presents challenges in translating economic growth into profit growth.”
Bloomberg reported that Vantage Global Prime market analyst Hebe Chen stated that for the Chinese stock market to achieve a lasting reversal, it requires stronger domestic consumption, credible solutions to the real estate downturn, and a restoration of investor confidence in corporate earnings and private investment. Until these fundamental improvements occur, while China may provide some market support, it has not yet developed the engines necessary to drive a sustainable rebound.