After an initial surge following the reopening of China’s stock exchanges on Tuesday, investor enthusiasm quickly evaporated as hopes for detailed stimulus measures from Beijing fell short.
While mainland Chinese and Hong Kong markets initially jumped by over 10 percent on Tuesday, much of that gain was wiped out after a press conference from China’s National Development and Reform Commission (NDRC) provided little new information about crucial economic support measures.
Lodewijk van der Kroft, managing director at Comgest Benelux, said investors were hoping for a substantial fiscal stimulus package from the Chinese government to revitalise the stagnating economy. Although there had been talk of a 285 billion dollar stimulus, the announcements proved underwhelming. «This is certainly a missed opportunity,» Van der Kroft told Investment Officer. «Without concrete measures, international investors remain uncertain about China’s economic outlook.»
Hang Seng erased last week’s gains
The CSI 300 Index, a major benchmark for the Chinese stock market, initially surged after the Golden Week holiday closure. However, it soon gave up much of its gains. The mood worsened with the Hang Seng Index in Hong Kong suffering a dramatic 9.4 percent drop — its worst decline since 2008 — erasing all of last week’s gains.
Despite some stimulus measures announced in late September, including interest rate cuts and relaxed rules for home buyers, the NDRC’s press conference offered little in terms of new policy. Zheng Shanjie, head of the NDRC, stated that the government remains «fully confident» in achieving its 5 percent growth target for 2024, even as economic pressures mount. Yet, this did little to reassure the market.
China’s CSI 300 Index, last five years
Source: Google Finance.
Missed stimulus expectations
Van der Kroft observed that China’s property sector, a critical driver of its economy, remains mired in a debt crisis that has plagued major developers. While the government’s recent stimulus included easing lending restrictions and efforts to stabilise the property market, these actions have not been enough to address broader concerns.
Analysts like Alicia Garcia-Herrero from Natixis echoed this sentiment, telling Reuters that the lack of substantial new fiscal measures heightened the risk of a market correction, especially if consumption data from Golden Week proved weak. «Holding a press conference without major announcements is not a wise move,» she added.
Weak consumer demand
China’s domestic consumption remains a major drag on its economic recovery. Since the pandemic, Chinese consumers have been reluctant to spend, a challenge that continues to hold back broader growth.
Van der Kroft pointed out that the Chinese consumer’s contribution to GDP remains around 53 percent, compared to 60 percent in Western economies and nearly 70 percent in the Netherlands. «This gap is significant and underscores the importance of stimulating demand as much as supply-side measures,» he said.
International investors on the sidelines
International investors remain cautious about Chinese equities, not only due to weak consumption but also because of ongoing geopolitical tensions. Under President Xi Jinping, foreign companies have found it increasingly difficult to operate in China. Furthermore, Chinese equities now account for just 2.94 percent of the MSCI World Index, down from twice that figure in previous years, reflecting how global capital is increasingly bypassing China.
Although the size of China’s stock market is vast, its performance continues to lag behind other global markets, particularly the United States. Without a stronger consumer recovery and more robust stimulus measures, sustained market recovery appears distant. Investors are likely to remain on the sidelines until clearer signals emerge from Beijing regarding its economic direction.
Luxury brands feel the ripples
The disappointment over China’s lack of additional stimulus was also felt in Europe, where French luxury brands such as Kering, the owner of Gucci, and LVMH were hit hard, losing five and four percent, respectively. In London, Burberry also dropped five percent, reflecting concerns over the slower-than-expected recovery in China.
While some, like China-watcher Louis Gave, founder of Gavekal Research, remain optimistic, pointing to the relatively strong renminbi and the potential for Chinese stocks to benefit from policy loosening, the reality for many investors is that without further stimulus and stronger consumer demand, the Chinese market remains a challenging environment.
Renminbi strength inspires optimists
Gave has pointed out that Chinese policymakers are confident in easing policy when the renminbi is strong against the US dollar, which tends to boost equity returns. «We are now entering such a period,» Gave noted, «with the recent policy easing providing a strong tailwind, particularly given the cheap valuations of Chinese equities, low interest rates, and low oil prices.» However, for many, the lack of immediate and clear government action keeps sentiment cautious.
Hangseng rally falters
Source: Google Finance.