Can China rescue its stock market with the proposed $278bn package?

China’s stock market had a rocky 2023 and its fortunes have not changed this year, with the country’s equities benchmark enduring its worst start to a year since 2016.

The Chinese stock market performance is reflective of an erosion of investor confidence in the country’s economy, its clampdown on the technology, payments and financial industries, as well its property sector that keeps on adding new names to a long list of embattled developers, analysts say.

China’s rather disappointingly slow recovery from the coronavirus-induced slowdown and its underwhelming response in bailing out the property sector have further dented confidence.

Policymakers are considering a 2 trillion yuan ($278 billion) intervention to support the country’s equities market and protect retail investors stung by their exposure to the property sector, according to reports.

Stock markets in Hong Kong and Shanghai tumbled last year as global investors left. The CSI 300 index, comprising 300 major stocks listed in Shanghai and Shenzhen, dropped 21.6 per cent over the past 12 months. Hong Kong’s Hang Seng index fell by about 29 per cent over the same period, according to Bloomberg data.

The performance of Chinese stocks is in contrast to global equities indexes that rose despite economic headwinds last year. The US benchmark S&P 500 index climbed 24 per cent in 2023, while the European index climbed about 13 per cent as Japan’s Nikkei 225 posted a 28 per cent jump last year.

Both US and Japanese stocks have had a positive start to the year, in contrast to Chinese equities, which have lost more than $6 trillion in market value since their 2021 peak.

The value of China’s equity market, the fastest growing in the pre-Covid world, has never been this far behind that of the US, Bloomberg data shows.

“Having recorded back-toback down years in equities, and with a well-documented set of macro and geopolitical challenges, it will naturally take time for investor confidence in China to recover,” Allianz Global Investors said in its China Equity Outlook 2024 report.

“Expectations have completely reversed since the end of 2020, when China’s Covid-free economy was riding high.”

The country’s economy, the second largest globally, expanded by 5.2 per cent last year, slightly higher than the government estimate. But the pace of growth in the country is at its weakest in more than 30 years.

The International Monetary Fund expects Chinese gross domestic product growth to slow to 4.2 per cent this year.

Although China’s long-term growth is expected to beat that of most western economies, policy stimulus will be needed this year for the country to achieve the projected growth of 4.5 per cent to 5 per cent.

“Policy support, with a potentially greater use of fiscal policy, is likely to be judiciously deployed to limit downside risks,” said Fitch Ratings, which also expects mainland China’s growth to moderate.

However, such policy support “may keep fiscal deficits wide and put further upward pressure on the debt ratio”, the rating agency said in its 2024 outlook for the Chinese economy.

The troubles for the Chinese stock market did not surface overnight. Beijing started to clamp down on technology and payments companies in late 2020 and the enforcement of new regulations on competition, consumer behaviour and data security resulted in significant market capitalisation losses for many stocks such as Alibaba.

The high-growth payments sector, which helped to keep the broader stock market on an upward trajectory for years, lost momentum and the ensuing crisis in the country’s property market dented equities further. Several Chinese developers, including China Evergrande and Country Garden, have since defaulted on their offshore debt and are being restructured.

Their failure does not bode well for the sector, which accounts for about a quarter of the Chinese economy.

Chinese authorities are considering a package of measures to stabilise the slumping stock market, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps, according to Bloomberg.

Policymakers are seeking to mobilise about $278 billion, mainly from the offshore accounts of Chinese state-owned companies, as part of a stabilisation fund to buy shares.

If China is spending the amount as reported, “it will be helpful to put a floor to the Chinese stock market”, said Richard Tang, equity research analyst for the Asia region at Julius Baer. “However, strong fiscal policy is also needed to fuel a sustained rally.”

Chinese and Hong Kong stocks have gained little ground since the news of the potential rescue hit the market.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said “scepticism reigned” as the rescue package was found to be meagre, compared with about $6 trillion of market value wiped off the value of Chinese and Hong Kong stocks in past three years.

“The rescue package doesn’t solve the underlying fundamental problems, namely slowing economic growth, a serious property crisis and slowing population,” she said.

According to Mr Tang, while the positive headline may spur a few days of rebound, the stock market will remain “data and policy dependent”.

New foreign direct investment into China fell last year to its lowest level in the three years as foreign companies and those in Hong Kong cut investments into the mainland.

New foreign investment in 2023 dropped to $153 billion, 8 per cent lower than in 2022, which was the highest on record since 2014, Bloomberg reported last week, citing Ministry of Commerce data.

The sagging Chinese stock market is reflective of an erosion of investor confidence in the country’s economy