Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Chinese stocks tumbled more than 7 per cent on Wednesday, snapping a 10-day winning streak, because of investor fears that Beijing’s stimulus efforts will not be enough to revive growth in the world’s second-largest economy.
The CSI 300 index of Shanghai- and Shenzhen-listed shares fell 7.1 per cent, closing below the 4,000 mark in a partial reversal of the market’s historic equity rally over the past two weeks.
The fall was sparked by a meeting of Chinese state planners on Tuesday, the first by policymakers after a week-long holiday, in which they provided no details of significant new spending plans to boost the economy. Wednesday’s drop was the biggest one-day decline for Chinese stocks since February 2020.
The sell-off came despite signs policymakers were preparing to announce more detailed measures this week. On Wednesday, officials announced a ministry of finance special briefing on Saturday that would focus on “intensifying countercyclical adjustment of fiscal policy”, which economists believe could point to additional stimulus measures.
Premier Li Qiang, China’s second-highest official, sought to boost investor sentiment, telling a gathering of economists and entrepreneurs on Tuesday: “When formulating and implementing policies, we should pay attention to . . . the voice of the market.”
“The ministry of finance press conference on October 12 is Beijing’s second chance to convince the market that its reflation pivot is back on firmer footing after the October 8 undershoot — but the bar is high,” Morgan Stanley analysts wrote in a note.
Many economists believe China needs to inject up to Rmb10tn ($1.4tn) in fiscal stimulus measures to reflate its economy and revive consumer and investor sentiment, on top of the monetary stimulus announced last month by the central bank.
“To exit deflation, we believe the need of the hour is a package of Rmb10tn geared towards supporting consumption and clearing the property inventory,” Morgan Stanley said in a separate note yesterday.
But they added that “policymakers appear hesitant to enact forceful fiscal easing”, with the size of any stimulus constrained by China’s already high public debt and declining local government tax revenues as land sales fall.
The yield on China’s 30-year government bonds fell 2.5 basis points to 2.345 per cent, and the renminbi weakened just under 0.1 per cent against the dollar to Rmb7.07.
While the country’s manufacturing sector has buoyed growth with strong export volumes, household demand remains weak. Rattled consumers have held on to savings, fearful of declining real estate values and incomes amid a property sector crisis and government crackdowns on sectors such as ecommerce, finance and private education.
“We see limited fiscal measures in the near term,” the Morgan Stanley analysts said, adding that if “social dynamics weaken materially, it could act as a trigger for forceful fiscal easing”.
Many analysts believe Beijing is reluctant to issue large amounts of new debt to channel funds to consumers, as many western countries did during the pandemic, preferring investment-led stimulus instead.
But if an economic downturn threatens social stability — the overriding priority of Communist party leaders — they might be forced to take more extreme measures to restore confidence, such as steps directly targeting household incomes.
Read the full article here
