On Tuesday, a disappointing government update dampened some of the optimism that had lifted Chinese stocks out of a bear market in recent weeks and put pressure on the stock market.
The Chinese government announced a series of monetary stimulus measures late last month, including lowering banks’ reserve requirements, cutting interest rates, and supporting equity markets. The country’s economic planning agency stated on Tuesday that it would accelerate some planned investments meant to assist the nation in meeting its growth goals for the year 2024. However, it did not outline any new stimulus measures. A massive rally was sparked by the long-awaited package, which restored some investor confidence in China. Within a week, the CSI 300, an index of mainland China’s largest stocks, increased by 25%. The Hang Seng index in Hong Kong also rose by more than 25% to a two-year high.
Investors were hoping for more from the announcement on Tuesday. When mainland markets reopened Tuesday morning after a week-long holiday, the CSI 300 gained approximately 11%, but it lost some of its gains and ended up up 5.9%. On Tuesday, shares of Chinese companies trading on U.S. exchanges also experienced sharp declines, with the Hang Seng falling by more than 9%.23 Alibaba Holdings (BABA), the largest e-commerce company in China, lost 6.7%, while JD.com (JD) and Temu-parent PDD Holdings (PDD), competitors, lost 7.5% and 5.4%, respectively. Li Auto (LI) and Nio Inc. (NIO) both experienced 8.1% declines.
Is China’s rally for stimulus over?
Some analysts were concerned that the rally had gotten ahead of itself prior to Tuesday’s announcement. Adam Turnquist, Chief Technical Strategist at LPL Financial, wrote in a note last week that “price action is extremely overbought on a shorter-term basis, and a pullback would not be surprising.”4 However, traders may still want to approach Chinese stocks with caution. Turnquist stated, “There is insufficient technical evidence suggesting a trend change toward sustainable China leadership is imminent.” However, relative to U.S. equity markets, China has made progress.
How will the rally be brought back to life?
The majority of experts agree that increasing support for the real economy will be necessary to sustainably revitalize China’s stock market.
In a note published on Saturday, V22 Research analysts Houze Song and Michael Hirson stated, “So far, the approach is more directly beneficial for Chinese equities than for real growth and commodity demand.” They asserted that in order for the overall economic outlook to improve, the government will need to announce more robust measures to encourage consumer spending and support the real estate industry.5 Hirson and Song anticipate that the announcement of this stimulus will come closer to the end of the month, when they anticipate the government will announce “CNY 1 trillion yuan of stimulus spending over the next several quarters.”
