Beijing Letter: Stock market rally fizzles out as Chinese hope for effective fiscal measures

China went back to work on Tuesday morning after a weeklong National Day holiday with the unlikely topic of the stock market dominating the conversation on social media and in real life. The markets closed before the holiday with a dramatic surge and everyone was waiting to see if the rally would carry on when they reopened.
Last March, a senior Goldman Sachs executive declared that “our view is that one should not invest in China” and that seemed to become the consensus view on Wall Street. With a three-year property market slump showing no sign of ending, slowing growth and exports facing trade barriers in Europe and the United States, China’s medium-term economic prospects looked gloomy.
It was a prognosis shared by many of China’s better-off as they grumbled in private about the policy direction set by the Communist Party leadership under Xi Jinping, who has appeared to prioritise security over prosperity. In the private dining rooms of Beijing’s more expensive restaurants, evenings would end with a lament for the days when there seemed to be no limit to the money to be made in China and a chorus of grumbling about the difficulty of moving it out of the country now.
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The mood shifted two weeks ago when the People’s Bank of China, the central bank, announced a raft of measures including lower interest rates and a cut in the amount of cash banks had to hold in reserve. Some of China’s biggest cities said they would scrap most rules restricting the purchase of property, including those around the “hukou” household registration system.
The market reaction was dramatic with 14 months’ worth of losses on Chinese shares reversed in less than a week. Investors who had dismissed China as “uninvestable” a few months ago were now clamouring to buy shares in anything Chinese.
Brokers reported a surge in inquiries about opening stock accounts as small investors rushed into the market, some in the hope of quick, speculative gains. A number of banks warned against borrowing to buy shares amid a sudden rise in loan applications, and social media were alive with reports of people taking advantage of lower interest rates to do just that.
“The new speculators should be cautious about entering the market and not listen to any expert analysis. I cleared out yesterday morning, as I’m sure most of the older investors would have done,” one smug investor posted on Weibo on Thursday.
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“Selling cars, selling houses and taking out loans to enter the stock market is totally undesirable. The principle of entering the stock market is to speculate with a small part of the money you have to spare.”
When I asked a Chinese friend who tends his shares and bonds every morning like a balcony garden if he got rich during the rally, he told me he had sat it out.
“I changed to a safer investment strategy to avoid market volatility. What happened around Chinese New Year taught me a lesson,” he said.
What happened then was that his shares surged and he bought more, only to see them tumble again and remain on the floor for months afterwards. He is sceptical about the latest rally enduring unless the government takes action to restore consumer confidence and domestic demand.
“If there’s no money, nothing can change spending behaviour. Chinese only spend when they are making a lot of money. When they have a lot of money but are not making money, they still don’t spend,” he said.
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“Consumer confidence is very low. They don’t have confidence in the economy or foreign trade. They can see how their neighbours or local businesses are struggling. And their largest asset, housing, is going down in value, so it is normal that they won’t spend. When there is no spending, there is no real economy.”
The markets feel the same way and when a government briefing about spending measures to stimulate the economy on Tuesday failed to live up to expectations, the rally fizzled. Hopes are now pinned on a finance ministry briefing on Saturday outlining the scale of the fiscal measures the government is planning even if the details are filled in later. Most economists agree that if it wants domestic demand, it will have to turn the property market around and ease the debt burden on the local governments responsible for most public spending in China. And the most effective way to boost consumer spending is to put money in the pockets of the poorest, including 300 million migrant workers from the countryside, who are most likely to spend it.
These steps would not only require a stimulus package worth up to 10 per cent of China’s gross domestic product but would reverse the party leadership’s longstanding opposition to property market speculation and to “welfarism”. But as Xi demonstrated two years ago when he abolished zero-Covid restrictions overnight, he may be too slow to change course but when he does so, it can be swift and emphatic.