Last week, the Chinese Communist authorities took a series of measures to boost the weakening economy, including cutting the reserve requirement ratio for bank deposits, allowing millions of homeowners and lenders to renegotiate, and reducing mortgage loan rates. These measures have driven a rebound in the Chinese stock market, with many investors optimistic that China’s stock market will enter a bull market.
However, economists at Nomura Securities have warned that investors should still soberly assess and prepare for a significant downturn in the Chinese stock market following the rebound, as the current economic foundation is much weaker than before the COVID-19 pandemic.
On Thursday, economists led by Ting Lu warned in a briefing to clients that in the most pessimistic scenario, “a crash will follow the stock market frenzy, similar to what happened in 2015.”
They cautioned that a bubble is brewing in the Chinese stock market, with the probability of a negative outcome much higher than in more optimistic scenarios. The risk of China reliving the drastic ups and downs of 2015 in the coming weeks will rapidly increase.
On Monday, China’s benchmark stock index saw its biggest surge since 2008, followed by the Chinese stock market entering a holiday market closure. On Wednesday, Hong Kong’s Hang Seng Index soared for the 13th consecutive day before experiencing a slight pullback on Thursday. This has fueled optimism in the market.
However, Nomura Securities economists warned, “Although investors may still revel in the heat of the moment, they need to make a more sober evaluation.”
They pointed out that the vulnerability of the economy is due to nearly four years of real estate crisis, high local government debts, escalating geopolitical tensions, the bursting of the investment bubble in the new energy sector, and significantly weakened trust between the public and private sectors.
Nomura Securities stated that if the rebound turns into a downturn, things may get worse, with a possibility of substantial capital outflows and depreciation pressure on the Renminbi.
Nomura cautioned investors that after enjoying the initial euphoria, they may need to prepare for the “worst-case scenario.”
Neo Wang, Managing Director of China Research at Evercore ISI in New York, believes that repeating the stock market crash of 2015 would be unbearable for the Chinese leadership.
Back then, from September 2014 to the peak on June 12, 2015, the Shanghai Composite Index more than doubled. Subsequently, the index plummeted by about 40% within approximately two months.
Nomura’s basic prediction is that this time the bubble bursting will be of a “smaller scale.” Beijing may introduce fiscal measures to stabilize demand, maintain the basic operations of local governments, but may not be able to solve any serious structural issues or clean up the mess in the real estate industry.