SUMMARY
- Bloomberg News’ report that Beijing is considering an equity market stabilization fund is plausible but we would be cautious as to the extent of that support, its long-term effectiveness, and the read-through to China’s broader stimulus policies
- The key challenge for China’s equity market is the poor macroeconomic climate and investors’ skepticism as to Beijing’s commitment to investor-friendly policies, where there is no quick fix
- Coming weeks will see more announcements and signals as to stimulus policies; these are likely to be mainly incremental, putting a floor under China’s GDP growth but not broad or forceful enough to quickly dispel concerns about deflation and weak domestic demand
Bloomberg News’ report that China’s government is considering a stock market stabilization fund of at least CNY 2 trillion (USD 278 bn) buoyed shares in Hong Kong on Monday but domestic markets were underwhelmed. The CSI 300 benchmark finished up only 0.4% for the day.
My initial take on the report isn’t radically different from what I have seen in other commentaries: a stabilization fund, if launched, could help establish a floor under shares but not durably revive the market on its own. The fundamental challenges for China’s equity market are macro and political and much harder to address.
On the macro side, the problem is an environment of weak domestic demand and ongoing deflation. Beijing will step up stimulus in coming months, though I remain skeptical that it will be of the scale or the nature to quickly break out of the dynamics above.
While a chorus of domestic economists are arguing that Beijing needs to confront deflation and fragile expectations with a forceful set of monetary, fiscal, property and structural measures, the leadership is reluctant to ease aggressively given concerns that this would worsen debt risks and economic imbalances. Beijing’s stimulus strategy is incremental and focused on supporting investment in infrastructure, affordable housing, and advanced manufacturing (see our review of the Central Economic Work Conference HERE). This supply-side approach is not well-equipped to boost broad private sector demand, particularly in the household sector where the concerns are falling property prices and weak income growth from a soft labor market.
On the political side, domestic and foreign investors remain skeptical that China’s leadership is genuinely committed to the private sector and a growth-driven agenda. Beijing has fumbled efforts to boost confidence, such as with the announcement in December of draft rules on monetizing video games that took investors by surprise. On Monday, the regulator removed the rules from its Web site. This is a positive step but the whole episode points to a lack of consistency in pursuing market-friendly policies amid a tight political environment that continues to stress Party control, national security and anti-corruption purges.
Clients frequently ask how much China’s leadership cares about equity values. My general response is that it is less than many investors assume. Xi Jinping has made it very clear that he views the role of capital markets as serving the real economy – such as funding China’s tech and advanced manufacturing stars – rather than existing for their own sake. Indeed, among his concerns is that China’s economy and society will be “financialized” as in the West. In a bank-dominated financial system, the equity market is less important for growth than it is in the US. Xi is much more likely to approve a market rescue if it seems necessary to preserve overall financial stability, which he does indeed regard as a matter of national security.
It is not clear that China is at that point. Unlike in the 2015 crash, there does not seem to be concern over high amounts of leverage in the market leading to margin calls or spillovers into shadow banking. Beijing’s biggest concern is likely the potential vicious cycle between selling of equities and pressure on the exchange rate to depreciate. And there is an argument that fear and emotion are driving recent selling, which seems to be somewhat out of proportion to the state of the economy (discussed below).
My point here is that while a market stabilization fund is plausible, investors should be skeptical of the degree to which equity markets drive Beijing’s overall policy reaction function and stimulus policies, which are more about the state of the real economy.
On that front, Q4 and December data show weak growth momentum and private sector demand (see our write-up HERE). The economy is not facing crisis and the situation is not as bad as it was at the cyclical bottom over the summer. However, Beijing clearly needs to step up its support measures to have any hope of reaching a GDP target in the 4.5-5% range this year.
The period from now until the start of the National People’s Congress on March 5, and especially before the start of the lunar new year holiday on February 10, will see continued announcements or at least signals of the total support package. These are likely to be incremental rather than the proverbial bazooka, but of course will be very important to monitor for gauging how aggressively Beijing will pursue growth and through which channels.
Among the key watchpoints are as follows:
- The extent of central government fiscal support for infrastructure investment, including the possibility of a special sovereign bond issuance (see our take on that HERE)
- More clarity on how the central bank will use its Pledged Supplementary Lending (PSL) facility to support infrastructure and affordable housing/urban village reconstruction
- Signs from local governments, who are holding their own prep meetings in advance of the NPC, as to their economic and investment targets in 2024
