Chinese shares rose 15% in 2024 for their first annual gain since 2020, says Bloomberg News. But “sentiment remains fragile”, with the CSI 300 index enduring its worst first trading day of a new year since 2016. Most of last year’s equity gains came following a “late September stimulus blitz”. Yet since then trading has been “range-bound” as investors wait for official announcements of more economic stimulus.
Why are Chinese stocks tumbling?
Stock markets have been cheered by a $1.4 trillion package of support for indebted local governments and promises of easier monetary policy, but bonds are telling “a bleaker story”, says Jacky Wong in The Wall Street Journal. Local bond yields have been falling – suggesting investors anticipate low inflation and weaker growth.
China’s 30-year bond yield traded at more than 4% in 2018, but recently fell below 2%, less than the equivalent in deflation-prone Japan. Japan learnt the hard way that “it takes strong, overwhelming stimulus to exit a deflationary spiral”. Markets aren’t convinced help on that scale is in the pipeline in China.
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State stimulus certainly moves markets in the short term, says Nicholas Spiro in the South China Morning Post. This autumn’s announcements saw the CSI 300 rocket 32.5% between September 23 and October 8. Yet despite continued measures aimed at stabilising the property market and helping consumption, trading has turned “volatile” in recent months. “The size... of the stimulus package” may be “less consequential than previously assumed”.
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Economists are also concerned about deeper “structural challenges, including heavily indebted local governments, an ageing population” and “excessive dependence on exports” says Reshma Kapadia in Barron’s. But stimulus is part of the picture and we may be in line for more – especially if Beijing is pressed into extra spending this year to offset Trump’s planned “volley of increased tariffs on Chinese imports”.
The bulls haven’t been routed. Goldman Sachs notes that government spending “has historically had a stronger impact on Chinese equity returns than monetary easing”, says Cao Li in the South China Morning Post. Goldman argues the stimulus policy puts a “floor” on the Chinese equity market. Moreover, says Hudson Lockett for Breakingviews, firms are “undervalued” and boast “higher cash flow and profitability relative to global peers”.
Yet sentiment is “precarious”. Tech giant Tencent’s shares sold off 7% in Hong Kong on 7 December after it was added to a US list of “Chinese military companies”. The classification carries “no material consequences” but shows that “perception” is important, too. Fund managers who bought into “last year’s rally” may start to conclude that “buying into the bull case is more trouble than it’s worth”.
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