China will launch a new stabilization package including about 2 trillion yuan ($278 billion) to buy mainland shares via offshore trading links in the coming days, government sources say. This would come after a market rout that has erased more than $6 trillion in market value from mainland China and Hong Kong stocks since a peak reached in 2021.
And certainly China’s stocks rallied on the news. The NASDAQ Golden Dragon Index of Chinese stocks traded in the United States closed up 4.84% today, Tuesday, January 23.
But considering the extent of the losses and its duration, I’d count a less than 5% gain–especially since the index was up by more than 6% earlier in the day–a tepid response by traders.
Two reasons for that, I think.
First, the history of China’s market interventions isn’t exactly awe-inspiring. Multiple rounds of efforts to reverse the selloff last year, including a reduction in stock trading stamp duty and ETF purchases by state-backed funds, fell flat. “The 2015 experience shows that even when the government steps up buying, the rally is not necessarily sustainable unless we have a bigger stimulus package to address the economic issues,” Michelle Lam, Greater China economist at Societe Generale told Bloomberg
Second, those “economic issues” look difficult to address and, so far, the Chinese government and the Chinese Communist Party don’t seem to be inclined to address them. A shrinking population and the associated negative sentiment about the economy’s future has cut domestic consumption. The real estate development sector is stuck in a worsening crisis. Local governments are facing a mountain of debt that will come due this year. And the country is engaged in a technology trade war with the United States.
I wouldn’t rush to put money into Chinese stocks on leaks of this plan or on its ultimate adoption.
