China’s stimulus measures spark a stock market rally

• China’s aggressive stimulus measures have sparked a significant stock market rally.
• Many analysts say the measure is not enough to solve the challenges in China’s economy.
• However, the measures aim to boost sentiment and stem the negative feedback loop between markets and the economy.

Skeptics have been out in force since China last week launched aggressive stimulus measures to prop up its struggling economy and markets.

It’s simply not enough to reverse the scale of China’s problems – including an epic property crisis and high youth unemployment – ​​they say.

Still, traders, investors and speculators sent China’s stock market to its best month in nearly a decade, signaling that market players believe Beijing’s moves are a “bazooka.”

On Monday, mainland China’s benchmark CSI 300 closed 8.5 percent higher, its biggest gain since 2008.

Hong Kong’s Hang Seng index gained as much as 4.2%.

The gains are significant as Chinese markets have been in a prolonged bear market until last week’s announcements.

“The PBoC and Politburo, all leaning towards putting a floor on property, boosting equities and supporting households, have hit the right notes,” wrote Vishnu Varathan, Mizuho’s head of macro research for Asia excluding Japan. in a Monday note.

The People’s Bank of China’s stock market stimulus has been unusual.

State-run China Securities Journal explained the thinking behind the move in an editorial on Monday

“The capital market is not only a ‘barometer’ of the macro economy, but also a ‘thermometer’ of investor sentiment,” said the editorial, which recognized the negative feedback loop between stock markets and economic sentiment.

“The development of the capital market is an important step in building confidence. An active stock market and improved investor confidence will improve expectations for economic development,” the news agency wrote.

the governor of China’s central bank Pan Gongsheng even said during his announcement of the stimulus measures on Tuesday that the authorities would consider injecting more liquidity into the system if measures to support the stock market from swaps and loans for share buybacks prove to be be successful.

Pan did not specify the definition of success and did not put a limit on the amount of additional liquidity the authorities could inject, fueling euphoric hopes that the Chinese Communist Party could be closer to throwing the kitchen sink.

“In other words, the state is effectively telling investors that the Chinese stock market will not continue to fall, and China will provide ‘unlimited ammunition’ to support the stock market,” Criss Wang, an independent analyst who publishes on the Smartkarma platform, wrote Monday.

Once the capital market is stabilized, overall sentiment will improve and boost the economy, she added.

New tactics and declining factory activity

The PBOC’s recent intervention is a “clear departure from previous policy,” Global Data.TS Lombard economists wrote in a note last week.

“The bank, which usually warns against speculation, now seeks to encourage it!” they added.

Whether such a strategy will work in the long term is a question mark, as China’s economy faces significant fundamental challenges.

Factory activity in China contracted for a fifth straight month in September, official data showed on Monday.

But financial markets are fickle and trading is increasingly automated, so there could be room for the rally to play out.

“The sheer easing of China’s coordinated stimulus manifests as ‘risk on’ and may take on its own momentum,” Mizuho’s Varathan wrote.

Hong Kong’s stock market will be closed on Tuesday for a public holiday.

Stock markets in mainland China will also be closed from Tuesday to Monday.