The People’s Bank of China reduced the reserve requirement ratio by 0.5 percentage points on Friday (27th), following a series of market rescue policies introduced by the Chinese government in recent days. The sluggish stock market began to rise this week. Experts analyze that the stock market is currently short-term bullish, but the key lies in observing whether the government policies can be effectively implemented, the economic fundamentals are developing healthily, whether the stock market system is reasonable, and if the supervision is effective.
After lowering the reserve requirement ratio, interest rates, and mortgage rates for existing homes on Tuesday (24th), the central bank announced another move on Friday, lowering the reserve requirement ratio for financial institutions by 0.5 percentage points starting from the 27th, aiming to inject around 1 trillion RMB of liquidity into the financial market to boost the sluggish economy.
The central bank also lowered the seven-day reverse repo rate from 1.7% to 1.5%, a decrease of 0.2 percentage points. This marks another reduction in the main policy interest rate in the past two months. This rate represents the short-term interest rate paid by the central bank to commercial banks for loans.
Encouraged by these measures, A-shares rose on the same day. By the close of trading, the Shanghai Composite Index was up by 2.88% to 3,087 points, the Shenzhen Component Index increased by 6.71% to 9,514 points, and the ChiNext Index rose by 10% to 1,885 points. Trading volume on both markets exceeded one trillion yuan for three consecutive days.
According to a report from Reuters on Thursday night, as part of a new fiscal stimulus, Beijing plans to issue 2 trillion RMB (approximately 284.3 billion USD) in special government bonds this year to boost consumption and help local governments tackle debt problems.
So far this week, stock markets in Shanghai and Hong Kong have increased by over 9%; the Shanghai Blue-chip Index has seen a surge of 10.8%, the largest weekly gain since December 2014.
However, Chinese issues expert Wang He told The Epoch Times on the 27th, “The current sharp rise in the stock market is only temporary.”
“This is due to the policies announced by the central bank on September 24, creating two structured currency instruments – ‘convenient exchange of securities, funds, and insurance companies’ and ‘special re-lending for stock repurchase and increase holdings’, with initial funds totaling up to 500 billion and 300 billion respectively, and there may be subsequent phases; this directly raised investors’ expectations for the Chinese government’s market rescue, and the stock market surged in response.”
American economist Huang Dawei analyzed for The Epoch Times on the 27th, “The current policies are only providing liquidity to the stock market, but they do not fundamentally change the structure of the Chinese stock market, such as inadequate protection for small and medium investors, severe rent-seeking behavior, and lenient punishment for financial fraud, with the money fines never being fully returned to small and medium investors as originally promised, etc.”
Over the past year, the Chinese stock market has been performing poorly. This year, actively managed emerging market ETFs have increasingly excluded China, and funds excluding Chinese assets have outperformed broader emerging market ETFs and China-focused ETFs.
According to data from FactSet, in the 12 months leading up to last Friday, the MSCI China Index fell by 2%, while during the same period, the S&P 500 Index rose by 30%, and the iShares MSCI Emerging Markets ETF (excluding China) rose by 19.3%.
The Wall Street Journal quoted Scott Ladner, Chief Investment Officer of Horizon Investments, as saying that in the past three days, the market reaction centered around the Chinese stock market has left some investors “confused” as they have not seen global stock markets rise after the Chinese government finally unveiled a “fiscal stimulus plan to rejuvenate the economy.”
In Ladner’s view, the “forceful signal for growth” issued by Beijing officials should have significantly boosted European stock markets, US small-cap stocks, and value stocks, but the reactions in these markets have been relatively subdued. “This is not the type of cross-market response that investors were expecting,” he told MarketWatch on Thursday.
The Wall Street Journal mentioned that investors are now wondering whether Beijing’s stimulus policies can reverse the downturn in the Chinese stock market and more importantly, the economic downturn.
Phillip Wool, Chief Research Officer and Head of Investment Management at Rayliant Global Advisors, stated that whether the stock market will continue to rise depends on whether the Beijing government will “persevere to the end” and “actually implement specific policies based on those announced.”
Regarding implementation, Huang Dawei suggested observing several points: first, whether China’s economy can currently reduce tax burdens, activate and encourage private economy, change the trend of national retreat and private advancement, improve the economic and trade relations with Europe and the United States; if these key points can be implemented, Chinese stock market ETFs are worth considering; otherwise, what is currently seen is only a short-term opportunity with greater risks.
Furthermore, he pointed out that attention should also be paid to the difference between the Chinese stock market and the world stock market. The Chinese stock market is more of a policy-driven market, with excessive intervention and government interference, and the government intervention is unstable.
Since the outbreak of the COVID-19 pandemic, the Chinese stock market has been affected by slowing economic growth and capital outflows, making it one of the worst-performing stock markets globally. The Hang Seng Index fell by 14% last year, and the Shanghai Composite Index dropped by 15%.
China has taken a series of measures to boost investor confidence, such as directly buying stocks to encourage corporate buybacks, but they have not had a significant impact. The latest data for August shows a comprehensive weakening of economic activity in China, with house prices experiencing the largest annual decline in nine years, while retail sales and industrial production continue to slow down.
The Wall Street Journal cited analysts saying that while the government’s direct purchase of stocks may help boost returns in the short term, developing plans to address the structural issues facing the Chinese economy is necessary for a reassessment of the value of the Chinese stock market.
Analyst Wang Ying from Morgan Stanley said the extent and sustainability of the rebound depend on whether China can successfully shake off deflation and whether corporate performance can hit bottom and rebound.
Huang Dawei also noted that the fundamental improvement in the Chinese economy has not occurred, so its current policies may have a short-term, at most, a medium-term temporary effect. In general, caution is advised when considering investments.
Overall, he believes that “European and American stock markets are worth watching in the medium to long term, while the Chinese stock market is worth watching in the short term, but it may be prudent to wait for an improvement in China’s economic fundamentals before considering buying ETFs (index funds).”
Currently, the economic data in China remains pessimistic. The latest data released by the National Bureau of Statistics of China shows that in August, profits of industrial enterprises above a designated size dropped by a staggering 17.8% year-on-year, marking the largest decline so far this year and the lowest point since May 2023, reversing the rising trend over the past four months.
Regarding the trajectory of the Chinese stock market, Wang He believes that “for the stock market to enter a bull market, three conditions must be met: first, the long-term healthy development of the economy; second, a rational stock market system; third, strict and effective regulation.”
Wang He stated that as 2024 approaches, the authorities have strengthened regulation, made some corrections to certain systems, and achieved some positive progress; however, the rationality of the stock market system has not been resolved, and there are concerns about whether strict regulation can be sustained in the long run. In addition, with the overall instability in the Chinese economy and a bleak outlook, considering these fundamentals, it can be inferred that the conditions necessary for the Chinese stock market to exit a bear market are currently not present.
“We may see a situation where new funds come in, those who were previously trapped seize the opportunity to escape, and the Chinese stock market spirals into a vortex of death, where no amount of additional funding can revive it.”
Huang Dawei specifically mentioned the assurances made by Chinese officials, comparing them to those made by Pan Gongsheng, the governor of the central bank, saying that he seems to casually increase funds by 500 billion today, another 500 billion tomorrow, and perhaps another 500 billion the day after, which gives the impression of a street performer rather than a policy maker.
“So, leading the Chinese securities industry in this way is quite worrying to me, and in fact, China has had excessive securitization and excessive financialization over the past decade or two, leading to the hollowing out of the overall manufacturing and real industries, the economy has shifted from real to virtual. Therefore, attention must be paid to the overall risks. That’s the overall situation.”