China's policy reversal makes stock rally 'mind begging'

Just a few weeks ago, many investors in China's stock market were ready to give up and eager to sell. Then late last month, traders rushed to make bullish bets after government leaders announced a series of measures to stimulate China's sagging economy.

On Tuesday, after a week-long national holiday, trading in mainland China resumed and investors picked up where they had left off. The CSI 300, an index of large companies traded in Shanghai and Shenzhen, jumped more than 10 percent before rebounding to around 6 percent growth.

The pullback reflected the absence of new measures at a much-anticipated press conference by top economic officials in Beijing in the morning.

Ahead of the holiday, the Chinese government sharply rocked stock markets with a package of measures aimed at halting a cycle of falling real estate prices and weakening consumer confidence.

The central bank and other top financial institutions announced on Sept. 24 that they are cutting interest rates, lowering minimum down payments for mortgages, and encouraging banks to lend investors more money to buy shares.

Two days later, the ruling Politburo issued an unusually blunt call for more to be done to help the economy. Several municipal governments soon trimmed or dismantled their restrictions on real estate purchases as a way to stabilize the housing market in their cities.

In response, the CSI 300 rose 25 percent in heavy trade in the five sessions before the holiday.

Retail investors in China have flocked to the market, jumping into online trading platforms such as Snowball and TigerBroker. The frenzy in Chinese stocks also spilled over to overseas investors who feared they were missing out on the biggest rally in decades.

Tae Chee Keng, an independent investor in Singapore who runs a YouTube channel on investing, says his inbox is flooded with requests for advice.

“People are thinking, 'If I don't have a stake in the Chinese stock market, I'm missing out' and everything has caught on like wildfire,” Mr Tay said.

Mr Tay, 26, has held shares in several Chinese companies in recent down years. He said he forces himself to consider any move for at least 48 hours. But he was almost tempted to abandon his discipline, he said, to invest in Chinese liquor company Kweichow Moutai, whose products can fetch thousands of dollars a bottle and whose shares rose nearly 40 percent in the week before the holiday closing.

He said, “This rally is just heartbreaking.

China's stock markets were among the world's worst performers before the recent turnaround. Since the start of 2021, the CSI 300 has lost nearly half its value, while Hong Kong's Hang Seng has fallen by more than half. After the recent rally, the CSI 300 is up 25 percent Higher this year and the Hang Seng, after Tuesday's tumble, is up more than 27 percent.

China's economy has endured three years of falling real estate prices, and a big question is whether China's leaders will pursue further economic stimulus measures.

But officials from China's economic planning agency, the National Development and Reform Commission, talked more about the economy at their press conference on Tuesday. The company is usually more focused on the needs of the Chinese people than pleasing investors, and the event concluded with assurances that China has sufficient supplies of poultry, vegetables and coal for the coming winter.

The tipping point that prompted the Chinese leadership to commit to action at the end of September remains a mystery. Economic data through the summer was weak but not catastrophic. Although the government is not scheduled to release detailed figures for September until Oct. 18, a survey of Chinese businesses by the China Beige Book, an economic research group, showed little change last month.

“After Beijing announced it would provide its most aggressive policy support in years, many analysts predicted that only an economy teetering on disaster would kick policymakers into action,” said Leland Miller, chief executive of the consultancy. “It's a compelling narrative, but it's wrong.”

The Politburo, the 24-member body that runs the Communist Party, conducts a comprehensive, quarterly review of economic policy, usually at the end of October. So investors were surprised when the Politburo called for immediate action at a meeting at the end of September.

The sudden change in strategy was all the more unexpected because there was a lack of urgency when the leadership met to review the status of growth just two months ago. Then, a Politburo statement said the economy “continues to rise and is trending positively.”

Leaders cited challenges including lax domestic demand. But they focused on a favorite theme of China's top leader Xi Jinping — “new quality manufacturing power,” such as electric vehicles — as a cure.

In mid-July, the party's Central Committee was also unprepared to hold a special meeting on long-term economic goals, a so-called third plenum that occurs roughly every five years.

Some foreign economists have suggested that China's recent moves could mark the beginning of a long-delayed effort to boost consumer spending and lay a more sustainable foundation for economic growth. But there are lingering signs that the country's leadership is still committed to building more factories despite signs of chronic overcapacity and falling prices in many industries.

“The manufacturing industry is the foundation of the nation and the foundation of a strong country,” Mr. Xi said in a Sept. 28 letter to workers at China First Heavy Industries, a state-owned company that makes smelters and industrial equipment.

Underlying many of the country's economic woes is the steep slide in apartment prices. During a boom that will peak in 2021, middle-class families put their savings into buying apartments, often borrowing to do so. Many have bought second and third apartments as investments. Real estate represents 60 to 80 percent of household wealth.

Existing home prices have fallen 10 percent year-on-year, and some economists have suggested the decline could accelerate to 15 percent next year if more is not done. The Communist Party Politburo recognized the problem at its session late last month. It directed officials to stabilize the housing market, strictly control any growth in construction and expand lending for government-sanctioned projects.

The danger for China lies in a possible repeat of the stock market collapse of 2015.

Faced with weakness in real estate prices, the Chinese government has engineered a rally that has seen the CSI 300 more than double in less than seven months. Millions of Chinese rushed to open brokerage accounts and borrowed heavily to place big bets on stocks.

Many lost most or all of their savings when the index pared most of its gains in the summer of 2015. Before that selloff, Chinese state media encouraged investors to buy.