Huge Bailouts Can’t Save China’s Stock Rout: Analysts

People walk across a bridge with a stocks indicator board in the financial district of Lujiazui in Shanghai, China, on Oct. 17, 2022. Hector Retamal/AFP via Getty Images

News Analysis

As China’s stock markets touch historic lows against U.S. stocks and the rout becomes a political problem for Beijing, even a reported massive bailout package in the works may not save China from the crisis of confidence gripping investors, analysts say.

There is an increasing chasm between Beijing’s optimistic rhetoric and the worries voiced by cautious investors and Chinese residents about the economy, they said, noting that markets and consumer confidence might be further eroded if Chinese authorities continue to fail in their efforts to reach the general citizens with its messages.

“We believe the stabilization package, if confirmed and implemented, could help boost market sentiment and liquidity, and could support a trading rebound in the near-term,” a Jan. 24 client note issued by OCBC Investment Research reads.

“We are still of the view the consensus [corporate] earnings estimate in 2024 is likely to be vulnerable to downward revision, [and] a sustainable re-rating would hinge on further coordinated policy support, a recovery in the real estate market, a smooth execution of debt restructuring and an improving corporate earnings outlook.”

The note also says that the health of China’s real estate sector will be a crucial focus for the confidence-shattered investors and citizens, as will be the central government’s willingness to leverage up to sustain the growth of the world’s second-largest economy.

According to Bloomberg News, Chinese authorities aim to mobilize approximately 2 trillion yuan ($282 billion), primarily sourced from the offshore accounts of Chinese state-owned enterprises. This fund is intended to serve as a stabilization fund for purchasing shares onshore through the Hong Kong exchange.

China Securities Finance Corp. and Central Huijin Investment Co., two state-owned financial institutions, have also been allotted 300 billion yuan ($42 billion) by the policymakers to invest in onshore equities.

Although that led to a price rise of more than 1 percent on Jan. 24, Chinese equities have lost more than 4 percent this month, poised for further slumps after hitting their all-time low this week compared to U.S. stocks.

Political Pressure

Following the tanking of the Shanghai, Shenzhen, and Hong Kong stock indexes, Chinese Premier Li Qiang, who chaired a cabinet meeting on Jan. 22, instructed officials to seek strategies to attract long-term investors to its capital markets.

According to a report by the state-run Xinhua News Agency, the State Council—the Chinese cabinet—was apprised of the status of the country’s stock markets.

Xinhua also reported that the meeting’s main points included the following: strengthening the capital markets’ foundational system, focusing on the ever-changing balance between investment and financing, making listed companies’ quality and investment value better, attracting more medium- and long-term funds, and making the market more stable overall.

On the same day, Reuters reported that big state-owned banks in China intervened to arrest the precipitous drop in Chinese share prices.

These announcements and moves follow a slew of measures by Beijing to stop the rout. They include informally instructing money managers in China to prioritize equity funds over other products; enforcing a new Beijing Stock Exchange policy prohibiting major companies from selling their own stocks; allowing more Chinese listed companies to buy back shares; and cracking down on short selling by hedge funds and brokerage houses using quantitative trading strategies.

Still, investors are unsure if the piecemeal efforts could save China’s market rout.

“Overall, we remain cautious, unless strong stimulus or meaningful reform, if any, [is implemented],” a Jan. 23 client note published by Jefferies reads.

Previous attempts to support the stock market, such as in 2015, were uneventful at best and downright harmful at worst.

Many equities investors have demanded substantial economic stimulus, but the authorities have been hesitant to provide it so far, according to analysts.

“Despite the abundant evidence that the recovery was falling short of expectations, Beijing has not wavered in insisting that the economy is still on track,” a client note published last week by the Rhodium Group reads.

In 2015, the stabilization efforts encompassed not only stock purchases but also cuts in interest rates and reserve requirement ratio, relaxation in margin financing, and suspension in IPO, among other things, according to the OCBC note.

Confidence at Its Lowest

In short, a crisis of confidence in the economy is deterring consumers from spending and investors from investing in China, given that Beijing is reluctant to acknowledge that the economy is in a downturn and that effective policies are required for long-term economic revival.

“There is growing uncertainty over Beijing’s economic policy stance,” the Rhodium Group said.

That aside, the Chinese economy is going to move forward steadily while overcoming problems and continue to give a strong impetus to the global economy, Li Yunze, director of the National Administration of Financial Regulation, reportedly said to global business leaders in Hong Kong on Jan. 24.

China’s premier claimed that the country’s GDP grew by 5.2 percent in 2023, the weakest since 1990, excluding the three pandemic years from 2020 to 2022. International economists believe the country’s economy will decelerate this year to about 4 percent and could even go below 3 percent in the medium term.

Last week, The People’s Bank of China held the medium-term policy rate steady, bucking market expectations for a cut needed to shore up China’s shaky post-pandemic economic recovery.

Analysts were disappointed to see the nation’s central bank retain the rate, indicating Beijing’s reluctance to seek short-term growth.

The Hang Seng index of the Hong Kong Stock Exchange has plummeted 10 percent this year, while the Shanghai Composite and Shenzhen Component indexes have fallen by 7 percent and 10 percent, respectively, reminiscent of the 2015 to 2016 Chinese stock market crisis.

Meanwhile, local investors are turning increasingly risk averse due to the widening losses in equities, which is driving big inflows into bonds as they seek safe haven assets, according to Bloomberg.

According to numbers compiled by Z-Ben Advisors Ltd., an analytical business based in China, bond funds raised 13 times more capital than equity funds in December 2023. Funds raised by bond vehicles hit a five-year high in the fourth quarter, while equity funds dipped to a five-year low, according to the numbers.