In the week leading up to the Chinese New Year, Chinese stocks tumbled, with all three indexes losing more than 2.5 percent. State-run Securities Daily called on institutional investors to rescue the A-share market, which resulted in a brokerage stocks sell-off on the same day. The market then bottomed out and rebounded. But industry professionals are doubtful whether a temporary bailout can change market expectations.
On Jan. 25, 2022, China’s SSE Composite Index fell below 3,500 points to 3,433.06, a 2.58 percent drop—the biggest one-day drop in 18 months. The SZSE Component Index on the Shenzhen Stock Exchange fell 2.83 percent to 13,683.89. The Chinext Price Index (399006.SZ) fell 2.67 percent to below 3,000 for the first time since May 14, 2021.
A-shares, ordinary renminbi shares, also set a record for the first time with the number of declining stocks exceeding 4,000 in a single day. According to Wind, 4,399 shares fell on the Shanghai and Shenzhen stock exchanges, 266 rose, and 27 were flat. The total net outflow of northbound funds on the day was 3.574 billion yuan (about $561.9 million), including 1.372 billion yuan (about $220 million) through Shanghai Stock Connect and 2.202 billion yuan (about $352 million) through Shenzhen Stock Connect.
‘Uphold the Backbone of A-shares’
Early on Jan. 26, Chinese state-run media Securities Daily, called on institutional investors to rescue the A-share market. The article started with a comparison between the Chinese and U.S. markets, questioning why the A-share market is falling when China’s growth potential is better than that of the United States.The front page article opined that institutional investors caused the A-share market to overreact to the bearish factors. Bearish is a stock market term referring to information that can drive down stock prices, such as an economic recession, inflation, natural or man-made disasters, etc. The article ended with a call for institutional investors such as securities companies, fund companies, social security funds, and insurance funds to “proactively maintain the stable and sustainable development of the capital market” and to “uphold the backbone of A-shares.”
Other Chinese financial journals also chimed in.
Shanghai Securities Journal also published an article on the same day, saying that “most institutions are not pessimistic about the post-holiday market and believe that A-shares have their own rhythm.”
China Securities Journal said, “It’s reasonable for the market to have a one-day adjustment… A-shares will show their own operational resilience.”
The Securities Times said, “The A-share plunge is mainly due to the suppression of risk appetite by peripheral risk events, and will not interfere with fundamental expectations in A-shares.”
A-shares opened higher and fell back after the CCP state media’s call in the early morning of Jan. 26. In the afternoon, the brokerage stocks supported the market. The three major stock indexes eventually rebounded and rose in a V-shaped pattern. “Supporting the market” refers to buying shares when stock prices are falling in order to reduce the decline and keep prices within a certain range.
Ceibs Fund Management Co., Ltd. (CEIBS Fund) issued a provisional announcement on the same day: CEIBS Fund will invest 50 million yuan (about $8 million) to purchase its medical theme fund within 30 trading days from the date of announcement and hold it for over three years. Ge Lan, the fund manager, will also invest 2 million yuan ($320,000) of her own money to buy the fund and hold it for more than three years. According to public information, several funds managed by Ge lost money in 2021, but the funders bought more shares to stop the downward trend.
Hua An Fund also announced on Jan. 26 that it would use its inherent capital to purchase its partial share public offering funds between Jan. 26 and Feb. 25, with a total investment of at least 50 million yuan (approx. $8 million). Hua An Fund also said it would continue to subscribe to the company’s public equity funds in the future.
In addition to brokerage buybacks, twelve of the Top 20 stocks on the Sina Finance list had major capital injections. Among them, Contemporary Amperex Technology (300750.SZ), Longji Stock (601012.SH), and Zhonghuan Semiconductor (002129.SZ) saw net inflows of more than 400 million yuan (approx. $64 million). East Money Information Co., Ltd. (300059.SZ), BYD (002594.SZ), and Zhongtian Technology (600522.SH) saw net main inflows of more than 200 million yuan (approx. $32 million). Inflow into northbound funds on Jan. 26 exceeded 5 billion yuan ($800 million), surpassing the outflow of the previous day.
Pessimistic Outlook
Du Kunwei, an online celebrity on Sina Finance and Economics, posted an analysis of the market dive on his blog on Jan. 26.Du said the reasons for the Shanghai and Shenzhen stock market adjustments are different from the adjustment in the United States. The U.S. stock market adjustment was due to the Fed’s tightening of monetary policy, which led to a revaluation of market value, and valuation needs a moderate fall. The A-share adjustment in China, however, was not triggered by monetary policy tightening. The Central Bank’s monetary policy is completely opposite that of the Federal Reserve, that is, lower interest rates in disguise leading to lower market rates.
Consumption in 2021 in China was weak because consumers were pessimistic about future income growth, and are afraid of spending money as they need to save for a rainy day, Du said. Furthermore, a fall in the stock market near the Chinese New Year peak consumption season will not only directly shrink people’s wealth, but also bring “pessimistic expectations.”
According to Dr. Li Songyun, the A-share plunge in China is not unexpected, because the stock market is most sensitive to expectations.
Li, who holds a PhD in economics and has long focused on the Chinese economy, told The Epoch Times that the stock market fall shows that investors are very pessimistic about China’s economic outlook.
Li said that, although China’s Central Bank recently cut interest rates several times and stated its intention to deflate the currency, the response of A-shares has been extremely lukewarm due to the lack of confidence. Instead of “1000 shares limit up,” everything fell. This suggests that of the three economic pressures facing the CCP, “weakening expectations” may be the most critical one, as market confidence has collapsed. Therefore, the Chinese Communist Party’s four major official securities media were all calling for investors to support A-shares just to boost market confidence and change market expectations.
At the beginning of 2022, China’s Central Bank continued to promote monetary easing policies. In particular, it has released favorable policies or information for several consecutive days beginning Jan. 17, such as cutting the medium-term lending facility rate (MLF) and standing lending facility rate (SLF). MLF and SLF are both monetary policy tools set up by the Central Bank. The difference between the two mainly lies in the length of the loan terms. But this time the market did not react much to the successive good news from the Central Bank.
Li said that it will now be very difficult for the communist regime to change market expectations. Although the CCP has recently released a series of economic data that looks very good, including good GDP and export growth, a high foreign exchange surplus, record foreign investment, and even record fiscal revenue, these data don’t stand up to scrutiny and are largely fabricated. The Chinese public felt the real impact of an economic recession in 2021, with job losses, wage cuts, and supply cuts, so it will be hard to boost market confidence.
Li said the CCP should be aware by now that many ordinary investors, having been squeezed or cheated repeatedly, have no more money to invest, so the Securities Daily called on institutional investors to “uphold the backbone of A-shares.” However, the most profitable industries, such as real estate, education and training, and Internet technologies, have been hit hard by the CCP’s strict regulations in 2021. Investors are probably at a loss as to what industries are still profitable and who will be targeted next.
Besides, there is a more realistic problem, Li said, the Federal Reserve will soon raise interest rates, and the risk of capital outflow is increasing, which makes A-share investors less confident.
