30 percent plus in two weeks: China’s stock boom is built on sand

With gigantic cash injections, Chinese President Xi Jinping has fueled the biggest stock market rally in Asia since 2008. But if he doesn’t keep feeding the monster, the party will soon be over. Only one option remains.

Being a stock trader on the Chinese stock exchanges has required extremely nimble fingers lately. After the holiday week around the National Day, the CSI 300, which measures the most important stocks on the two largest mainland stock exchanges Shanghai and Shenzhen, shot up by almost 11 percent at the opening on Tuesday. But the euphoria didn’t last long: at the end of the day, the index finished trading with a gain of just over six percent. And it fell just as quickly today: by just over 7 percent – the biggest crash since 2020.

The roller coaster stock market is an alarm signal that the stock rally in the Middle Kingdom is on extremely shaky ground. Investors are still betting that the best stock market week in China since the 2008 financial crisis will continue. On September 24th, the Chinese central bank put together the largest economic stimulus package since the Covid pandemic. In addition to the key interest rates, the central bankers also reduced the interest rates for current mortgages and the minimum down payment for property purchases. Since then, the CSI 300 has gained more than 30 percent in just two weeks. In fact, in just under a week, because the trading floors had been closed since October 1st until Tuesday.

But as it now turns out, disillusionment is spreading after the big bang. All investors are hoping that China’s economic planners will add more economic stimulus pills. But Beijing’s bureaucrats have not delivered as expected. “This is what happens when you feed the monster,” the Financial Times quoted an analyst as saying. “Every day you have to increase the amount of food you eat. Otherwise it will turn against you.”

China’s economic planners are feeding the monster

The nervous ups and downs are the clearest sign yet that the winning streak on the markets could just be a flash in the pan. Hope is currently the only driving force behind stock market fever. Only the promise of more and more economic stimulus is keeping it going. Because things are actually anything but good in China.

Beijing’s top planner said on Tuesday that he has “full confidence” that China’s economy will reach the official benchmark of 5 percent growth this year. But he didn’t have anything more than wishful thinking in his luggage. Above all, no further spending programs that investors had hoped for.

Even if the People’s Republic were to reach its self-imposed target, growth would still be at its lowest level in decades. The days when the Middle Kingdom grew by a good ten percent year after year are long gone. The real estate crisis has the country firmly in its grip: banks are still groaning under a gigantic mountain of bad loans after inflating a credit bubble in the construction sector at the behest of the party, and entire ghost towns are standing empty all over China. Since the Covid pandemic, China’s economic engine has never really gotten going.

It seems as if after the real estate bubble there is now the stock market bubble. Analysts at Morgan Stanley are already warning of overheating. “The sustainability of this China rally will depend on whether words are followed by action on the fiscal side,” Bloomberg quoted an investment manager in Hong Kong as saying. But that’s exactly where the decision-makers in Beijing are still keeping a low profile. They have simply announced that they want to continue issuing ultra-long-term bonds. But when and how much money should be spent is anyone’s guess.

Historical crash course in Shanghai

The World Bank is now warning that the economic aid of the past few weeks is “no substitute for the more far-reaching, structural reforms that are necessary to boost longer-term growth.” Although it expects further growth of 4.8 percent this year, it should only be 4.3 percent in 2024. Last year, the International Monetary Fund (IMF) also predicted that China’s growth would be below 4 percent in the medium term.

It is clear that it will not work without further debt: “China’s economy will only gain further momentum if significant and sustained fiscal measures come onto the agenda,” Bloomberg quoted Jones Lang LaSalle’s chief China economist as saying. But the financial world is divided as to whether the rescue plan will succeed. And whether it is now time to get involved in China’s stock market miracle or to turn your back on the country.

Stock booms in the Middle Kingdom have already proven to be deceptive before: in 2014, when China was also in a growth slump and the party therefore distributed economic stimulus, the Shanghai stock exchange doubled its value in six months. And then from mid-2015 it crashed spectacularly by 40 percent in just a few weeks.

In addition, there are geostrategic shifts and risks that cannot be ignored, above all the US presidential election in a month. If Donald Trump moves into the White House and implements his 60 percent tariff on all imports from China, the stock exchanges in Shanghai and Shenzhen are unlikely to be unaffected. Xi Jinping probably has no choice but to turn on the money tap further.

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