After the end of the National Day holiday in China, on Tuesday, the National Development and Reform Commission of the Chinese Communist Party reiterated recent economic policies, without the expected fiscal stimulus measures. This led to a significant narrowing of the gains in A-shares on that day. After the opening of the Hong Kong stock market, prices of various stocks plummeted, marking the largest drop in nearly 16 years. It is believed within the industry that some investors have been taking profits.
Economists point out that the aggressive measures taken by the CCP to stabilize the market during the National Day holiday were more of a face-saving measure and akin to a temporary boost showing significant gains. However, severe deflation issues have resulted in increased losses for enterprises. Attempts at a rebound have turned into a survival strategy for many, either for profit-taking or for assisting bigwigs in the market.
On Tuesday, the National Development and Reform Commission held a press conference, expressing “confidence” in achieving economic growth targets, but failed to announce any new stimulus measures that the market was anticipating. Judging from the stock market’s reaction, the highly anticipated press conference seemed to disappoint the public.
Chinese stocks reopened on Tuesday with both the Shanghai and Shenzhen markets surging by over 10% at the opening, but the lack of positive news from the CCP affected investors’ willingness to chase after highs. By the close of the session, Shanghai stocks saw gains of 4.6% while Shenzhen stocks saw gains of 8.9%. Hong Kong stocks plummeted by 9.4%, marking the worst single-day performance since the 2008 global financial crisis.
The pessimistic sentiment spread to the U.S. market as well. Reuters reported that Chinese companies listed in the U.S. saw a decline in stock prices at the opening on Tuesday, with leading firms such as Alibaba’s American Depositary Receipts (ADR) dropping by about 8% in pre-market trading. Chinese electric vehicle maker NIO fell by 8.4%, gaming company Bilibili dropped by 12.4%, and search engine giant Baidu saw a 7.1% decline.
Market analysts believe that one of the reasons for the sharp decline in Hong Kong stocks in the morning was profit-taking, while the other reason was the lack of the expected “breakthrough policies” in the National Development and Reform Commission’s press conference, leaving no surprises for the market and prompting investors to sell off stocks before any further declines.
Xie Jinhe, Chairman of Caixin Media, mentioned that markets driven by monetary injections would ultimately face the test of fundamentals.
In March of this year, in an effort to stimulate consumption, the Chinese State Council announced a large-scale “old for new” program to encourage individuals and enterprises to purchase new appliances and equipment. Following this, in May, the CCP introduced the “May 17th real estate policy,” hailed by the BBC as a “historic” stimulus with three arrows fired simultaneously. They also allocated 300 billion yuan (about $42.8 billion) to acquire excess residential housing, which was dubbed as an “epic market rescue.”
However, according to reports from Yicai and financial markets, since September 24th, despite the consecutive rises in the stock market, over 100 listed companies have announced reductions in shareholdings within two weeks, with high-ranking executives and shareholders from various companies forming groups to offload stocks, including central and state-owned enterprises.
In response to this, political and economic commentator Wu Jialong stated that the recent surge was a chance for these major shareholders and funders, including state-owned enterprises, to offload their shares and take advantage of the rally. He emphasized that the market’s constant rally was all about unloading stocks, turning the market momentum into a means for profit-taking and stock dumping.
“If there’s such a good market, why not sell? Moreover, they lack confidence that the economy will truly improve in the future.”
Chen Songxing, a professor at the National Development and Mainland China Research Institute of the Chinese Culture University, mentioned that enterprises wanting to sell off their stocks are an indication that these business owners and shareholders are not optimistic about the future. As they face pressures from other loans, they aim to convert their current holdings into cash, which is understandable from a financial perspective.
Fan Jiazhong, a professor of economics at National Taiwan University, also echoed similar sentiments, stating that everyone knows this is a “survival wave” that won’t last, likening it to a zombie’s last burst before inevitable decline. With gains of 25% in mainland stocks and 35% in Hong Kong stocks, this is a significant surge, prompting investors to clear out their stock holdings while they anticipate an imminent downturn.
Regarding the recent series of market intervention measures by the CCP, whether it can reverse the country’s economic situation, Wu Jialong believed it was too early to tell in the short term, requiring at least a two-week observation period. There is typically a time lag between financial market reactions and the real economy, with financial markets often leading the actual economic trends. Hence, financial markets are currently monitoring whether the real economy is truly picking up; if not, profit-taking and selling pressures are likely to emerge.
Analysts from banks like BNP Paribas SA and Bloomberg Economics suggest that China’s “GDP shrinkage index” is likely to continue its five-quarter decline trend and extend into 2025, marking the longest deflationary period in China since data records began in 1993.
Chen Songxing indicated that the primary reason for the CCP’s market interventions is the severe deflation issue that China is facing, evident from indices like the Consumer Price Index (CPI), Producer Price Index (PPI), as well as recent fluctuations in food and automobile prices. With five consecutive quarters of negative growth, it poses a challenging problem with sticky deflationary tendencies that are hard to address.
“At present, it appears that the recovery of consumer confidence is still premature due to the lack of a social welfare safety net in China. People are reluctant to spend, leading to a crisis in consumer confidence,” mentioned Chen Songxing.
As for the significant rise in the Chinese stock market within a short period, Fan Jiazhong pointed out that this was a standard policy move to stimulate the market and implement measures to rescue the stock and housing markets. He stressed that China’s economic downturn stems from structural issues that cannot be resolved simply by implementing market-saving measures.
“In other words, China’s economy is critically ill. Giving it a dose of excitement may seem invigorating, but in reality, it hasn’t improved at all.”
Regarding the timing of these policies, Fan Jiazhong stated that it was likely due to the significance of October 1st being the National Day, and the unseemly plunges in the stock market that needed to be addressed to save face.
According to data from the National Bureau of Statistics of China, as of the end of June, around 30% of industrial enterprises were in losses, surpassing the record set during the 1998 Asian financial crisis. Surveys of over 500,000 companies indicated a sharp deterioration in the state of industrial enterprises in the first half of this year, with the number of loss-making enterprises skyrocketing by 44%.
In response to this, Chen Songxing drew attention to China’s heavy reliance on exports for about 20% of its economy. Currently, in the situation of overproduction, they resort to dumping overseas, leading to tariff measures from Europe and the United States. China has had to turn to developing countries with lower incomes to offload goods at lower prices. Re-establishing a costly distribution network, the volume of exports may grow, but the export value is actually declining, showcasing a scenario where efforts become futile, and enterprise losses escalate.
Reported by Bloomberg, institutions such as J.P. Morgan Asset Management, HSBC Global Private Banking and Wealth Management, and Nomura Holdings Inc., alongside other organizations, have been skeptical of the recent rebound in the Chinese stock market from its lows.
Wu Jialong stated that without improvement in China’s real economy, solely relying on monetary easing within the financial sector and providing leniency on property loans may not solve the underlying issues. Addressing the real estate problem hinges on overdevelopment and surplus production; propping it up would only worsen the situation. What should be done is to let the failing elements declare bankruptcy; holding onto socialist principles without allowing for bankruptcies has led to the current dire state of affairs.