Shanghai and Hong Kong had their best month in years. Here are the policy changes proposed by Beijing to solve China’s several economic problems.
The two main Chinese stock markets saw their best day since the 2008 financial crisis as investors cheered the recent policy change. The world’s second-largest economy has been grappling with severe economic headwinds in the past few years, and now Beijing looks set to turn the situation around.
The blue-chip CSI 300 index jumped as much as 9.1% on Monday, its best performance since 2008. The index bond to the 300 highest-valued public companies in Shanghai and Shenzhen had lost 45% of its value since 2021 but now rebounded by over 20%.
Analysts believe the index is headed to a technical bull market.
The Hang Seng index had its best month since November 2022, rallying by almost 20%. This index follows the performance of the Hong Kong Stock Exchange, the only one in China completely open to foreign investors. Its performance reflects the optimism of foreign observers about China’s future economic outlook.
The rally has been so sustained that many analysts consider it to indicate concrete prospects for China’s immediate future. “I think the euphoric surge that we saw last week in China markets could turn into something more concrete and sustainable because there appears to be a complete policy shift that could finally address the cyclical headwinds of the past 3 years,” said David Chao, a strategist at Invesco Asset Management.
“While there may still be debate over how these policy shifts are implemented and whether enough has been done, I think a new direction has been charted.”
Policy changes
The most important policy change implemented by the Chinese government was a $284 billion direct stimulus.
The People’s Bank of China issued sovereign debt bonds whose proceeds will go toward fiscal relief measures for Chinese consumers. They will also provide direct financial benefits to families with more than one child.
China’s central bank also lowered mortgage rates for property owners, and several megalopolis across the country implemented similar policies on a local level.
The real estate market crisis is at the center of China’s current downturn. The crisis depressed Chinese consumers, who in turn stopped spending and caused a deflationary spiral.
Earlier this year, the PBOC issued a $41 billion stimulus package to repurchase unsold homes, though it was considered far from enough by analysts.
“From a macro perspective these policies are not that important, as these cities account for a small share of the national property market,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “The key policy to address the macro challenge remains to be fiscal.”
Still, markets now trust the Chinese central government to steer the ship in the right direction. And, as it often happens with large stock exchanges, this could become a self-fulfilling prophecy.
