China’s economy continues to struggle, and the authorities recently introduced a series of stimulus measures, which led to a surge in the stock market. Experts point out that these measures are not sufficient to promote sustained recovery and eliminate ongoing deflation. The market rebound under the “strong expectation, weak reality” scenario hinges on the degree of improvement in the real economy.
Since September 24, the Chinese authorities have unexpectedly rolled out a series of economic stimulus measures, resulting in a significant surge in the stock market. On September 30, the three major A-share indices soared throughout the day, with the ChiNext Index up over 15%, and the total turnover of the Shanghai and Shenzhen stock markets reaching 2.59 trillion yuan. The Shanghai Composite Index returned to the long-unseen 3300-point level within five trading days.
Will the struggling economy, especially the real estate sector, see a turnaround? Many are wondering: “How far can the market go?” Domestic and foreign experts hold a cautious stance, expressing doubts about the sustainability of the market rebound.
On October 1, “Caijing” quoted Guan Tao, the Chief Economist of China Construction Bank Securities, analyzing that the central bank can only provide liquidity but cannot solve the fundamental issue of demand.
Currently, the burden of debt on enterprises and households is heavy, and there is a lack of willingness and capacity for investment and consumption, highlighting the prominent contradiction of insufficient domestic demand in China. Countercyclical leveraging by the government has become the key to expanding domestic demand. Only when the real economy improves, business operations are enhanced, household incomes increase, can the foundation for a rise in the financial markets be solidified.
Guan Tao stated that the current market rebound is under the premise of strong expectation but weak reality. The sustainability of the market trend depends on the degree of improvement in the real economy. Subsequent incremental fiscal policies are crucial. With limited time left this year, expectations for a new round of fiscal stimulus should not be excessively high.
According to Sina Finance, Liu Yuhui, a member of the China Chief Economist Forum, recently remarked that such a “mass movement” seen in stock markets is unprecedented. He pointed out that the current stage is characterized by abundant and exaggerated “animal spirits,” devoid of logical reasoning.
Hong Hao, Chief Economist of BOCOM International, commented that current trading is more emotionally driven, and the repair of fundamentals and structural reforms will still take time.
On October 1, The Wall Street Journal mentioned that it is too early to determine whether China’s recent intensive stimulus measures over the past week can revive economic growth.
While stock investors celebrate, can the struggling economy sustainably improve? Official and private economic activity surveys released on September 30 highlight challenges – manufacturing activities have shrunk for the fifth consecutive month, along with a series of weak data. Economists believe this is the reason behind the sudden actions taken by the CCP government.
Larry Hu, Chief China Economist at Macquarie, stated that policies have entered emergency mode.
Although CCP officials have pledged to increase fiscal spending, no specific figures have been provided, and little detail has been offered. While the authorities promise to stabilize the real estate industry, analysts believe that the details announced so far are far from sufficient to achieve this goal.
Some economists express a greater concern that the measures taken by relevant departments are inadequate to drive sustained recovery and eliminate the threat of persistent deflation.
Nick Borst, China Research Director at California-based asset management firm Seafarer Capital Partners, emphasized that the current guidance in the market is driven more by hope than reality, posing risks.
The report mentions that concerns about the fundamentals of the Chinese economy still persist. The official Purchasing Managers’ Index (PMI) shows that manufacturing activities have been contracting for the fifth consecutive month, with weakening export orders, and surveyed companies remain cautious in hiring.
In September, the service industry PMI also slipped into contraction territory, another sign of wavering consumer confidence. Recent data also indicates a slowdown in retail sales growth.
Economists argue that the Chinese government needs to provide more detailed information on fiscal policy plans to evaluate the effectiveness of the stimulus program. While interest rate cuts are a popular measure, data and surveys show that many households and businesses are still reluctant to borrow, undermining the expected effects of the central bank’s loosening measures.