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Chinese stocks tumbled more than 7 per cent 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 Shanghai- and Shenzhen-listed shares fell 7.1 per cent, closing below the 4,000 mark in a partial reversal of the market’s historic equity rally over the past two weeks.
The fall was sparked by a meeting of Chinese state planners on Tuesday — the first by policymakers after a week-long holiday — in which they provided no details of significant new spending plans to lift the economy. Wednesday’s drop was the biggest one-day decline for Chinese stocks since February 2020.
The sell-off came despite signs policymakers were preparing to announce more detailed measures this week. On Wednesday, officials announced that a finance ministry special briefing on Saturday focused on “intensifying countercyclical adjustment of fiscal policy”, which economists believe could point to additional stimulus measures.
Many economists and investors say a package of fiscal stimulus is needed to boost growth, on top of the monetary stimulus announced last month by the central bank.
“To exit deflation, we believe the need of the hour is a package of Rmb10tn geared towards supporting consumption and clearing the property inventory,” Morgan Stanley analysts said in a note.
But they added that “policymakers appear hesitant to enact forceful fiscal easing”, with the size of any stimulus constrained by China’s already high public debt and declining tax revenues as local governments suffer a fall in land sales.
The yield on China’s 30-year government bonds fell 2.5 basis points to 2.345 per cent, and the renminbi weakened just under 0.1 per cent 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 formulating and implementing policies, we should pay attention to . . . the voice of the market.”
Economists believe China needs to inject up to Rmb10tn ($1.4tn) to reflate its economy after a property slowdown and government crackdowns on sectors such as ecommerce, finance and private education weakened consumer confidence.
While the country’s manufacturing sector is surviving on strong export volumes, household demand is weak as consumers save money out of concern over falling property values and pay cuts.
“We see limited fiscal measures in the near term,” the Morgan Stanley analysts said, adding that if “social dynamics weaken materially, it could act as a trigger for forceful fiscal easing”.
Many analysts believe Beijing is reluctant to issue large amounts of new debt to channel funds to consumers, as many western countries did during the pandemic, preferring investment-led stimulus instead.
But if an economic downturn threatens social stability — the overriding priority of Communist party leaders — they might be forced to take more extreme measures to restore confidence, such as steps directly targeting household incomes.