Chinese shares fall as Beijing tries to shore up confidence in the economy

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Chinese shares fell more than 7 percent on Wednesday, snapping a 10-day winning streak, on investor fears that Beijing’s stimulus package will not be enough to revive growth in the world’s second-largest economy.

The CSI 300 index of shares listed in Shanghai and Shenzhen fell 7.1 percent to close below the 4,000 mark, in a partial reversal of the market’s historic rally over the past two weeks.

The fall was triggered by a meeting of Chinese state planners on Tuesday – the first for policymakers after a week-long holiday – in which they did not provide details on significant new spending plans to boost the economy. Wednesday’s drop was the biggest one-day decline for Chinese stocks since February 2020.

The selloff came despite signs that policymakers were preparing to announce more detailed measures this week. On Wednesday, officials announced a special finance ministry briefing on Saturday that will focus on “stepping up the countercyclical adjustment of fiscal policy,” which economists believe could point to further stimulus measures.

Many economists and investors say a fiscal stimulus package is needed to boost growth, on top of the monetary stimulus announced last month by the central bank.

“To break out of deflation, we believe the need of the hour is a 10t Rmb package aimed at supporting consumption and offsetting property inventory,” Morgan Stanley analysts said in a note.

But they added that “policymakers appear reluctant to embrace forced fiscal easing”, with the scale of any stimulus constrained by China’s already high public debt and falling tax revenues as local governments suffer a slump in land sales .

China’s 30-year government bond yield fell 2.5 basis points to 2.345 percent and the renminbi fell just under 0.1 percent against the dollar to Rmb7.07.

Premier Li Qiang, China’s second-highest official, sought to boost investor sentiment, telling a gathering of economists and entrepreneurs on Tuesday: “When we formulate and implement policies, we should pay attention to . . . the voice of the market.”

Economists believe China needs to inject up to 10 billion lei ($1.4 billion) to restart its economy after a slowdown in property ownership and a government crackdown in sectors such as e-commerce, finance and private education dented confidence. consumers.

While the country’s manufacturing sector is surviving on strong export volumes, consumer demand is weak as consumers save money due to falling property values ​​and wage cuts.

“We see limited fiscal action in the near term,” Morgan Stanley analysts said, adding that if “social dynamics weaken materially, this could act as a trigger for forced fiscal easing.”

Many analysts believe Beijing is reluctant to issue large amounts of new debt to channel funds to consumers, as many Western countries have done during the pandemic, preferring investment-based stimulus.

But if an economic downturn threatens social stability — the top priority of Communist party leaders — they may be forced to take more extreme measures to restore confidence, such as measures that directly target household incomes.