China marked the start of the Year of the Dragon over the weekend after a week of market turbulence that reflects global concerns about the condition of the world’s second largest economy. A flurry of government activity saw Chinese equities rally sharply during the week but the overall economic picture remains gloomy.
Shares in mainland China and Hong Kong have lost $7 trillion in value, about a third of their value, since their peak in 2021 and foreign investors remain wary despite the recent rally. At a recent Goldman Sachs conference in Hong Kong, more than four out of 10 investors surveyed said that Chinese equities were “uninvestable”.
The stock market plays a much smaller role in China’s economy than in the United States and foreign investors account for only a small share of it. But the accelerating sell-off in recent weeks was serious enough to spur Beijing into taking steps to arrest it.
These included an instruction to state-backed investors to buy shares in mainland Chinese equities and curbs on short-selling. The head of the country’s security regulator was dismissed on February 7th. These moves signalled to investors that Beijing was prepared to take more action to support the markets, pushing key indexes to record highs. But the authorities will need to do much more to address the underlying problems that have undermined investor confidence.
The rebound that followed the lifting of zero-Covid restrictions at the end of 2022 was weaker and more short-lived than expected and after a brief surge in spending, consumer confidence evaporated. Much of the problem lies in the prolonged crisis in China’s property market which has driven some of the country’s biggest developers to the edge of bankruptcy and had a knock-on impact on local government.
Falling property prices have made consumers more cautious, fuelling deflation as they postpone purchases in the expectation that prices will fall. As Chinese consumers are saving rather than spending, the country’s manufacturers need to export more to support growth, but they now face a more unfriendly environment than before, particularly in the United States and the EU. The European Commission is investigating Chinese subsidies for electric vehicles and Donald Trump has threatened to impose a 60 per cent tariff on all Chinese imports if he returns to the White House.
The government’s response to the property crisis has been uncertain and Xi’s focus on national security has alarmed investors as he has used the coercive power of the state to clip the wings of high-flying entrepreneurs. The overnight lifting of zero-Covid restrictions showed how boldly Beijing can act when a policy is no longer effective; a similarly dramatic reset may be required now to restore confidence and reignite the economy.