In today’s Finshots, we tell you why and how China is trying to cushion its stock market from a crash and whether the action is moving any needles.
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The Story
China’s CSI 300 stock market index lost 15% of its value in 2023. Foreign investors had dumped a record number of shares and the China story seemed over.
But guess who was on the winning side of this bet?
India!
Our stock market had soared by 20%. And you could attribute a significant part of that success to the nearly record-high inflow from foreign investors — which was over a whopping $21 billion.
And maybe the Chinese government didn’t like what was happening. Maybe they felt they were losing out to India. And so, they went on overdrive. They recently halved taxes on stock trading. They want more people to invest. Their Central Bank relaxed rules on how much money banks must keep with it and that means there’s more capital available in the market.
But the biggest move?
Government-backed Chinese companies or what analysts call the ‘national team’ have been nudged to invest in the markets too. They’re buying funds that track Chinese stocks left and right. According to a Goldman Sachs report as of Monday, they’ve invested in about $10 billion worth of Chinese stocks over the past month. And it’s all in an attempt to stop the bleeding and support the markets.
So the question is ― Will China’s government intervention be able to redeem its stock market?
Well, if you look back to 2015, you’d think the answer is a resounding yes.
Because back then, the CSI 300 had crashed and in a last-ditch effort to save it, the Chinese government formed the ‘national team’ for the first time. These folks pumped money into the markets and bought nearly 6% of the Chinese stock market. And by the end of the year, the CSI 300 had outperformed the American S&P 500!*
You’d chalk that up as a win, wouldn’t you?
Also, a research paper published in the Pacific Basin Finance Journal supports the theory. It says that when Chinese government-backed companies invested in the stock market, it sent a signal to other investors. It boosts their confidence and they think, “Hey, if the government is willing to bet their money on these stocks, why shouldn’t we?” Their investment improved liquidity in the market too. And the end result is that stock prices stabilised in the short-term.
So you can see why the national team is a perfect strategy for China again.
But even then, not everyone agrees that what worked in 2015 will work in 2024 in China.
You see, the Chinese economy was still on pretty solid footing back then. It was only a stock market bubble that had burst. So investors were also willing to come back once the bubble had burst.
But that’s not quite the same situation today.
We’ve previously written about how China’s strict lockdowns killed the economy, how Chinese real estate developers are on the brink of default due to unbridled construction activity, and even why the future of Chinese consumption is in danger. And all this indicates that investors are selling Chinese stocks because they sense a real economic problem today. It’s not because they fear a bubble is about to burst.
And shrewd investors will be aware that any rise in stock prices won’t be because the companies are making healthier profits. It’ll simply be a result of excessive government interference. So they’d be careful about throwing their hat (and money) in the ring.
Also, they might be worried about what will happen when the government finally decides to exit these stocks, no? It could create another market crash especially if the economy is still lacklustre at that point.
So yeah, we don’t know how all this will play out. China’s national team might still need to pump in nearly 3 times what they’ve done so far to bring stability to the markets. And if they don’t, it could mean that foreign investors continue to flock to Indian shores. Big investment houses are singing praises about us already and when their money floods in, it could propel our market to new heights.
What do you think will happen?
Until then…
*In the first week of January 2016 though, China’s stock markets crashed, wiping out over $1 trillion in market value. January 7th, 2016 was China’s shortest stock market trading day ever since it force-stopped trading if any stock fell by 7%. So you can see why intervention by the national team was just a temporary fix even back then.
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