What is needed for a sustainable recovery of the Chinese stock market
The rebound in Chinese stocks on Wednesday as policymakers do what it takes to offset the hit from lockdowns tied to its zero-Covid policy likely won’t be sustainable unless Beijing rolls out the kind of large-scale stimulus it wants. has been reluctant to implement – and even then it could take time to stabilize the economy.
Economists were wary of China’s ambitious 5.5% economic growth target even before Shanghai and other cities were locked down and the economic backdrop only deteriorated with the shutdowns.
But on Wednesday, the Wall Street Journal reported that President Xi Jinping had ordered officials to ensure that China’s economic growth outpaces that of the United States, even in the face of a lockdown. On the table are plans to speed up major construction projects and issue coupons to boost consumer spending, according to the report.
Talk of stimulus tends to cheer up the markets. the
iShares MSCI China
exchange-traded fund (MCHI) rose nearly 4% to $48.21 and the
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The ETF (CNYA), which is invested in domestically listed stocks, gained 4.7% to $32.80 on Wednesday.
But it may still be premature. Chinese officials have stepped up efforts to reassure investors that help is on the way, that their crackdown on the tech sector could run out of steam, and that they are trying to broker a compromise with U.S. regulators to avoid the write-offs that threaten Chinese stocks listed in the United States.
And analysts note a marked shift in policymakers’ view of the stimulus and now expect further rate cuts, increased infrastructure spending and an easing of restrictions on the sector. real estate. But some fear that is still not enough, especially given the loss of income and the shaken confidence created by the closures.
“Unless the government makes direct fiscal transfers like the United States did in 2020 – in huge proportions – to make up for lost revenue in places like Shanghai, consumer spending will be very weak and disappointing,” said Arthur Budaghyan, chief strategist at BCA Research, adding that China has never done the kind of fiscal shifting he thinks is needed to deal with economic challenges.
The other problem: since 2009, China has not experienced an economic recovery without a solid real estate market. If lockdowns begin to ease and the stimulus is met with pent-up demand to boost property sales, analysts at Gavekal Dragonomics say that could spark a rally in onshore stocks.
Beijing’s crackdown on the real estate sector and its longer-term goal of reducing debt and property speculation could also worry potential buyers, which does not bode well for a sustained recovery in the near future.
Stimulus efforts may also be too late for a recovery this year, says Freya Beamish, head of macroeconomic research at TS Lombard. The business cycle typically doesn’t turn until liquidity growth does, and then only with a lag of about three quarters. Although officials are aggressively increasing infrastructure spending, Beamish says it won’t fuel nominal GDP growth until the end of the year.
“Infrastructure spending is only preventing a deterioration in growth, as lockdowns continue and real incomes are squeezed. China will be lucky to avoid its version of a recession this year, whether we define as something similar to what happened in 2015, but this time around the stakes are higher because the real estate market model is broken,” Beamish said. , the economy may simply be stabilizing rather than recovering.” A stimulus may be needed, but it won’t be enough to bottom out Chinese stocks. It may be a ‘show the money’ and a recovery in the real estate market is needed,” BCA’s Budaghyan said.
Lockdowns set to lift in a few weeks could offer a reprieve for struggling Chinese stocks, but investors may need more indications that the economy can heal – and geopolitical tensions are not escalating – before plunging. .
Write to Reshma Kapadia at [email protected]