Chinese officials pulled out rarely used and more aggressive measures to tackle wounded confidence in its struggling economy on Monday. While stocks are getting a boost, it won’t last unless policy makers do still much more.
As Barron’s noted about two weeks ago, weakness in the Chinese market is likely to push Beijing to take more steps to stabilize the economy. The country’s benchmark CSI 300 index was down 4% year to date before news Monday that the government is reducing a tax on trading for the first time since 2008, and will seek to reduce the supply of initial public offerings so as not to divert investor interest from other stocks.
Beijing is cutting the duty on stock purchases by 0.05 percentage point from 0.1% and cutting the minimum margin ratio for financing to buy stocks from 100% to 80%. Analysts at Gavekal Dragonomics described the measures as “relatively aggressive tools, suggesting officials are concerned about recent weakness in capital markets,” but noted the reaction has been more tepid than in the past.
The
Shanghai Composite
Index closed up a bit more than 1% on Monday. That is a contrast to the multiple days of 9% gains logged in 2008 when the authorities took similar measures.
“A sustained market rally is unlikely without substantially more stimulus to bolster economic growth and stabilize the property sector,” the analysts said in a note to clients on Monday. “Stamp-duty reductions and new-listing halts have in the past provided only a temporary bump to markets, not a fundamental turnaround. The only subsequent market rally, in 2008, arrived when the economic growth outlook improved meaningfully late that year.”
For now, investors are still looking for measures to bolster confidence and reverse the growing view that Beijing is hamstrung in its efforts to roll out the stimulus needed to do that by debt and long-term challenges like geopolitics and a shrinking population, not to mention an ideological aversion to handing out the type of direct consumer stimulus that could help.
Write to Reshma Kapadia at [email protected]
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