Tech & Trade: Why reversing China's $6 tn stock market rout won't be easy

In 2024, the Chinese stock markets experienced their worst start to a year since 2016. Throughout January, China’s markets have predominantly been in the red. The country’s benchmark stock index, the Shanghai Composite Index plummeted 7% at one point and the CSI 300, which replicates the performance of China’s top 300 stocks saw a drop of 6%. Meanwhile, the Hong Kong markets have also been seeing a downward spiral. Hong Kong’s Hang Seng Index crashed about 10% this year. Chinese and Hong Kong shares haven’t just had a bad start to 2024; in fact, they’ve been going rough since they reached a peak in 2021. Over the past three years, China and Hong Kong stocks have lost some $6.3 trillion in market value or roughly twice the annual economic output of Britain. The stock market rout has severely hampered investors’ confidence.

What is causing the slump in Chinese markets? The world’s second largest economy is plagued with a myriad of problems. To begin with, China has seen a patchy economic recovery since 2020 due to the Covid-19 pandemic. In 2023, China’s economy grew by 5.2%. Although it hit Beijing’s target, the reading was one of the lowest in at least the past two decades. Despite the pandemic, 2021 still saw better growth than 2023. According to Morgan Stanley, China’s tepid growth is expected to weigh on the entirety of emerging markets. China is also caught up in a debt-deflation spiral. Beijing’s deflationary pressures just aren’t going away. While other foreign central banks are dealing with inflationary pressures, China is the only major economy where prices are falling. Analysts say, this is particularly challenging because Beijing is also facing elevated debt levels. Chinese cities have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. According to reports, the International Monetary Fund and Wall Street banks estimate that total outstanding off-balance-sheet government debt at somewhere between $7 trillion to $11 trillion. In 2021, China was hit by the worst property market crisis and that has only exacerbated its debt woes. Morgan Stanley says China is facing a 3D problem. It says the country faces challenges in terms of debt, deflation and demographics. In 2023, China reported a record low birth rate- the lowest since the founding of communist China in 1949. Last year, China’s population shrank 0.15% while it declined 0.06% the previous year. In 2022, the country had recorded its first population decline in decades. In terms of births, around 9.02 million babies were born last year falling down 9.56 million births in 2022. China’s declining demographics threatens its workforce which may further dent the country’s growth prospects. Will China be able to control the market rout? In the last week of January, Beijing made a big move to stimulate the economy by unexpectedly cutting its Reserve Requirement Ratio (RRR). The central bank said it will lower the RRR by 0.5% from February 5. This was the central bank’s biggest cut in a little over two years. Meanwhile, reports say, the government is mulling a rescue package worth about 2 trillion yuan or $278 billion. The money is expected to come mainly from the offshore accounts of state-owned enterprises. However, some investors have raised doubts over its efficacy because Beijing’s previous rescue efforts haven’t always worked. The deliberations are emblematic of the heightened urgency amongst Chinese authorities to stem the rout. The deepening stock-market turmoil highlights a crisis of confidence among investors. Traders are becoming increasingly gloomy about China’s economic outlook. The selloff has also triggered public anger on Chinese social media with topics like “market plunge” and “China’s stock market rescue” trending on its social media platforms. The astonishing losses are reminiscent of China’s 2015-16 stock market crash. However, the economic backdrop of 2015 was very different from the present one. This time around, investors are keen for more concrete steps from Beijing. With declining investor optimism, it remains to be seen if a quick turnaround will be a tall order for China.