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Friday, September 22, 2023

China’s Stock Market Recovery: Skepticism Amid Government Measures

BusinessChina's Stock Market Recovery: Skepticism Amid Government Measures

Jacky Jia, a software engineer in Shanghai, like many of China’s 220 million retail investors, is uncertain about the future of China’s stock market. Despite a series of measures by the Chinese government to boost the market, confidence in a long-term recovery remains tentative.

Recently, Chinese regulators implemented a series of interventions to stabilize the market. They cut stamp duties on transactions, restricted major shareholders from making large divestments, and took a more stringent approach towards approving new share offerings. These actions momentarily eased the sell-offs affecting the onshore market.

As a result of these measures, Jia, who works for a Japanese software company, considered a fixed monthly investment from his salary into stocks. However, hesitations remain. “I’m about 60% confident in the market,” Jia remarked. He acknowledged the policy changes but highlighted the lingering concern about market fundamentals. In his view, a lack of monetary inflow and confidence are significant hindrances, with the latter playing a pivotal role.

Restoring this dwindling confidence among both retail and institutional investors is a challenge that the China Securities Regulatory Commission (CSRC) is grappling with. Overseeing the nation’s $10 trillion stock market, the CSRC plays a crucial role in influencing economic policies.

For months, the market’s sentiment has been fragile. Expectations of a robust post-Covid economic recovery haven’t come to fruition. Unlike the ‘bazooka’ stimulus approach taken during the 2008 financial crisis, policymakers have been more cautious this time around, opting for a piecemeal strategy. One such move involved the People’s Bank of China cutting the reserve requirement ratio for yuan deposits by 0.25 percentage points.

Nevertheless, efforts to bolster investor confidence have had some positive outcomes. The CSI 300 Index, which had faced a bear market since January 2022, has shown signs of stabilization since April. Furthermore, some international investors have exhibited increased optimism due to current distressed stock valuations.

Jian Shi Cortesi of GAM Investments in Switzerland remarked on China’s pivotal role in the global economic arena. “China will contribute to roughly one third of global economic growth this year,” Cortesi stated, emphasizing that earnings growth will likely be the main driver for stock prices.

In late August, the finance ministry made another move to prop up stocks by announcing a 50% reduction in the stamp duty for share transactions. However, the market response was subdued, with the CSI 300 Index seeing only a marginal rise.

For Invesco, a major US asset manager, the cut in stamp duty was more symbolic than merely reducing trading costs. Chris Liu from Invesco emphasized that the change sent a clear message about the commitment to revive the market sentiment. He hinted at the potential for further policy support if required.

Despite these actions, concerns persist, especially among overseas investors who have divested significantly from Chinese stocks. Gary Dugan from Dalma Capital Management in Dubai expresses skepticism about China launching a large-scale stimulus. Dugan believes that while China aims to reduce reliance on the real estate sector and debt-driven growth, global investors might remain wary about a centrally planned economy achieving such a transformation.

Swiss bank UBP’s Carlos Casanova echoes Dugan’s sentiments, suggesting that more policy backing and a sustainable earnings recovery are essential for a genuine stock market revival.

China’s real estate sector, which significantly contributes to the nation’s $18 trillion economy, is also a concern. Regulatory efforts since 2020 to control leverage in the sector have led to liquidity issues and plummeting sales. This downturn has, in turn, negatively impacted the stock market.

Recent measures to support the property market, such as easing conditions for first-home purchases in major cities, have elicited a mixed response. While there was a noticeable surge in property viewings and purchases in the major urban areas post-announcement, the sustainability of this uptrend is uncertain. Financial giant Nomura Holdings contends that more needs to be done to genuinely address the housing crisis.

Nevertheless, not everyone holds such a pessimistic view. The Hang Seng Mainland Properties Index has recently shown promising growth, outperforming other indices in Hong Kong and mainland China. Redmond Wong from Saxo Markets believes that the synergy of recent policies could set the stage for an upward market trajectory.

UBS Group, too, is optimistic, seeing potential turning points for Chinese stocks. Meng Lei, a strategist at UBS, suggests that earnings might have hit their lowest in the second quarter, making it an opportune time to invest in stocks related to economic growth.

Jacky Jia’s stance represents the collective sentiment of many retail investors. Having seen a 5% return on his investments so far this year, primarily from brokerages and consumer stocks, Jia remains wary. He believes the key lies in improving economic fundamentals and hopes for more proactive policies from the government to bolster economic growth and the stock market.

While efforts are underway, only time will determine if the market will regain its lost confidence and momentum.

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