In response to the recent China equity market rout, policymakers vowed last week to stabilize the market through more forceful measures. Despite a very positive initial market reaction (an 8% rebound in three days), deeper fundamental issues such as deflationary risks and lack of demand remain key concerns for China’s economy. To turn the quick technical rebound into a sustained rally, more stimulus is needed.

MSCI China and MSCI ACWI year-to-date returns
Rebased to 100 at January 1, 2024

MSCI China and MSCI ACWI year-to-date returns
Source: Bloomberg, Principal Asset Management. Data as of January 31, 2024.

China’s equity market followed up a very weak 2023 with another 10% loss in the first three weeks of 2024. With such a severe and extended market slump threatening to further depress investor sentiment, policymakers have been forced to confront the pervasive weakness of China’s equity market.

At the January State Council meeting, policymakers vowed to take forceful measures to stabilize the market, fueling a sharp market rebound:

  • People’s Bank of China (PBoC) unexpectedly cut the Reserve Requirement Ratio by 50bps, effectively unleashing RMB 1 trillion of liquidity into the economy.
  • Although not yet confirmed, Bloomberg reported that the PBoC is set to establish a RMB 2 trillion market stabilization fund.
  • The China Securities Regulatory Commission introduced short-selling restrictions.

However, the market rally is unlikely to endure. China is struggling with depressed household confidence, exacerbated by entrenched property market weakness, while deflation means that financial conditions are tightening even as authorities ease monetary policy. Current market rescue efforts may only establish a market floor—they aren’t enough to fix underlying economic weaknesses.

To drive a sustained rally, policymakers likely need to set aside debt and leverage concerns and embrace a wider fiscal deficit and targeted property measures that can reinvigorate economic momentum. While it’s possible that the National People’s Congress meeting in March unveils more concrete stimulus measures, for now, China’s investment outlook remains uninspiring.

Macro views

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