China's aggressive economic stimulus has caused a significant rise in stock prices, and although many analysts say the measures are not enough to solve China's economic challenges, the measures have boosted sentiment. , aims to break the negative feedback loop between the market and the economy.
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Skepticism has grown since China launched an aggressive stimulus package last week to shore up its deteriorating economy and markets.
They say it's not enough to reverse the scale of China's problems, including its epic real estate crisis and high youth unemployment.
Still, traders, investors and speculators pushed China's stock market to its best month in nearly a decade, suggesting market participants view Beijing's move as a “bazooka.”
On Monday, mainland China's benchmark CSI 300 ended 8.5% higher, its biggest gain since 2008.
Hong Kong's Hang Seng Index rose as much as 4.2%.
This increase is significant since the Chinese market had been in a long-term slump until last week's announcement.
“Both the People's Bank of China and the Politburo are focused on boosting real estate prices, increasing stock prices and supporting household finances, and are hitting the mark,” Vishnu Varasan, Mizuho's head of macro research for Asia ex-Japan, said in a Monday memo. I'm getting it,” he said.
The People's Bank of China's stock market stimulus plan was unprecedented.
State media outlet China Securities News explained the thinking behind the move in an editorial on Monday.
The editorial stated, “The capital market is not only a 'barometer' of the macro economy, but also a 'thermometer' of investor psychology,'' acknowledging the vicious cycle that creates negative feedback between the stock market and business sentiment.
“The revitalization of the capital market is an important development in strengthening confidence. A vibrant stock market and improved investor confidence will raise expectations for economic development,” the media wrote.
China's central bank governor, Ban Gongsheng, even said in Tuesday's stimulus announcement that authorities would consider injecting more liquidity into the system if measures to support the stock market through swaps and share buyback loans were successful.
Pan did not elaborate on his definition of success or set limits on the amount of additional liquidity that authorities could inject, fueling euphoric hopes that the Chinese Communist Party might come close to throwing out the kitchen sink. .
“In other words, the state is actually telling investors that the Chinese stock market will not fall any further and that China will provide 'unlimited ammunition' to support the stock market.” says Chris Wang, an independent analyst who publishes on the Smart Karma platform. I wrote it on Monday.
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Once capital markets stabilize, overall sentiment will improve and boost the economy, he added.
New strategy and shrinking factory activity
The People's Bank of China's latest intervention is a “clear departure from previous policy,” economists at Global Data TS Lombard wrote in a note last week.
“Banks that normally warn against speculation are now trying to encourage it!” they added.
Whether such a strategy will work in the long term is a question mark, as China's economy faces serious fundamental challenges.
China's factory activity shrank for the fifth consecutive month in September, official data showed on Monday.
But financial markets are fickle and trading is increasingly automated, so there may be room for the rally to continue.
“Full easing from China's coordinated stimulus package appears as 'risk-on' and could gain momentum of its own,” Mizuho's Varasan wrote.
The Hong Kong Stock Exchange will be closed on Tuesday as it is a public holiday.
Stock markets in mainland China will also be closed from Tuesday to Monday.
