The market wants more from China

China’s market had an epic rally after China’s central bank unveiled a slew of monetary stimulus measures in September. 

A big question remained, though: how long will it last? We may have gotten some clues as the market reopened on Tuesday after a seven-day National Day holiday from October 1 to 7, as the policy-driven rally seemed to have lost some momentum. 

The CSI 300, which tracks the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, surged nearly 11% during the market open on Tuesday. But the index eased some gains throughout the day to finish 6.1% up.

Meanwhile, Hong Kong’s benchmark index, Hang Seng, slumped 5.6% on Tuesday, wiping out all gains during the National Day holiday (the Hong Kong stock exchange was closed only on October 1).

The decline was partly due to a disappointing presser from China’s top economic planner. After late September’s stimulus — which included rate cuts, lower existing mortgage rates, lower required reserve ratio, and a 800-million-yuan liquidity support for the stock market — traders were expecting more details on fiscal stimulus from the government to get the economy back on track. That includes spending incentives, special bonds, and support for “new college graduates, migrant workers, the unemployed, elderly, and disabled,” analysts said.

But at its first post-holiday meeting, the National Development and Reform Commission (NDRC) “did not provide any more details around the shape and size of the fiscal support that has been announced,” Deutsche Bank analysts wrote in a note.

Wall Street was expecting somewhere between 2 trillion and 3 trillion yuan in fiscal packages. The NDRC, however, announced a modest 200 billion yuan (about $28.3 billion), 100 billion yuan of which was going to construction projects. 

Some China watchers said that the announcement wasn’t surprising, given how Chinese government agencies usually behave. NDRC’s main goal was likely not to meet the market where it was, but more to send a signal to top government officials about the intent to target the economy, notwithstanding concrete policies.

Still, the CSI 300 finished at another record high. ETFs that track China megacaps gained over 30% in the past month, outperforming the S&P 500.

The market vs. the economy

Broadly, analysts agree that the booming stock market doesn’t change the fundamentals of China’s economy, which has been on a downhill path since 2021. But degrees of optimism over the market rally differ. 

Goldman Sachs upgraded its call on Chinese offshore stocks (Chinese companies that trade in Hong Kong or the US) to overweight on October 7 and shifted its tactical preference from H-shares (that are traded in Hong Kong dollars) to A-shares (that are traded in Chinese yuan), saying in a note to clients that these stocks are more directly exposed to stock market stimulus and retail investors’ participation.

Indeed, the retail sentiment alone, independent of fiscal measures, was strong in China. State media reported a 4x to 6x surge in the number of new brokerage accounts, mostly from young people. ETF inflows and margin financing activities also rose. Shares of China’s brokerage software like Hithink Flush and East Money have more than doubled since September 23.

But others see the Chinese economy as a deeper problem. Adam Wolfe, emerging markets economist at Absolute Strategy Research, distinguished between the stimulus measures for the real economy and the stock market, calling the former “mostly incremental, small, and inconsequential,” while the latter was “new, unlimited, and significant.” 

Olivier d’Assier, Head of APAC, Investment Decision Research at SimCorp, said that China’s banking system is “teetering on the verge of collapse,” and the announced stimulus was not enough.

“It is $59 trillion in size and only $142 billion was announced to recapitalize it — compare this to a US banking system of $23.4 trillion, much better diversified than China’s, and where the Fed spent $475 billion to recapitalize it during the GFC,” he said.

“As for the market, this is a policy-driven rally. It won’t last and it won’t change the equation for investors — most of whom will not have bought at the bottom,” d’Assier added.