China’s equity market is grappling with persistent challenges as investor confidence continues to wane, despite the government’s efforts to stimulate economic growth, Bloomberg reported.
The recent interest rate cut by the People’s Bank of China has failed to generate enthusiasm among equity traders, with trading volumes remaining significantly below average. The CSI 300 Index, representing the top 300 stocks in Shanghai and Shenzhen, has been stuck in a bear market for over a year, reflecting investors’ prevailing lack of confidence.
Investors had hoped that 2023 would be a turnaround year for Chinese stocks as they counted on Beijing to revitalize the economy and revive the property market after years of COVID-19 restrictions. However, weak sentiment has replaced the initial optimism, proving difficult to reverse and wrong-footing China’s stock bulls for the second consecutive year. Experts cited by Bloomberg point to the need for China to create an environment where producer prices recover, the equity market regains traction, and concerns over credit risks associated with local government financing vehicles are alleviated.
Consumer Concerns and Record Youth Unemployment
Consumer confidence in China remains low, with few signs of improvement in sight. The economy continues to grapple with record levels of youth unemployment, exacerbating concerns about the long-term prospects of the job market. Additionally, the housing market has experienced its longest-ever downturn, creating further apprehension among investors and households. The prevailing sense of lost animal spirits risks becoming a self-fulfilling prophecy, with some experts drawing parallels to Japan’s ‘balance-sheet recession’ scenario.
Stimulus Efforts and Property Market Revival
Chinese authorities are considering a broad package of stimulus measures, explicitly focusing on reviving the property market to boost market sentiment. However, the impact has been limited, as a gauge of developers’ shares rose less than 1 percent in response to the news. The recent cut to the seven-day reverse repo rate is expected to make it cheaper for banks to borrow from each other, potentially reducing the cost of loans that underpin mortgages. While these measures provide some relief, analysts cited by Bloomberg argue that a more proactive approach from Beijing is necessary to address the underlying concerns and restore investor confidence effectively.
Struggles to Restore Confidence
Despite a decisive shift in policy tone favouring private enterprises, risk aversion among businesses, households, and investors remains high. The equity market is witnessing a lack of appetite for fresh capital, as evidenced by a meager 81 new fund launches in May, the lowest level in eight years. Even as Beijing encourages funds to increase their equity allocations, it will require significant efforts to make Chinese A-shares a more attractive asset class.
Market analysts have revised their China stock-index targets downward in recent weeks, reflecting the deepening losses onshore and in Hong Kong. The upcoming decision on the one-year policy rate by the central bank, along with May data on industrial production and retail sales, will provide further insights into the market’s trajectory. Market watchers cited by Bloomberg stress the importance of signaling confidence and offering additional support measures to invigorate investor sentiment. With China’s comparatively lower inflation and significant reserve of resources, experts believe the country can provide stimulus and reignite its equity market.
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