Stocks shed sharply
But, policymakers would do well to ignore the noise
- There is a significant lack of confidence among investors in China, as evidenced by the recent sharp declines in its stock market. So far, regulators have adopted a three-pronged approach to address stock market instability, including injecting liquidity, mobilising funds, and increasing regulatory oversight.
- However, there is uncertainty whether these measures will be effective. Similar interventions in 2015 did not achieve their goals – and were eventually wound back. Back then, the attempts to boost – or at least cushion – economic growth, while also defending the exchange rate, pumping up equity valuations, and maintaining some level of stability for real estate were commanding a vast amount of capital, and something had to give. The competition for financial resources is intense, limiting the range of support measures available to policymakers.
- Any relief provided by these measures is expected to be only temporary. And allocating resources to the stock market is a diversion from underlying problems. Instead, the recommended priority is on stabilizing the broader economy and enabling investors to differentiate between idiosyncratic and systemic risks.
- Unfortunately, markets seem eager for bold shift and stronger government stimulus to boost economic activity and immediately change market sentiment. They are likely to be disappointed. Rather, expect more of the same incremental policy measures in 2024. Stimulus measures will be calibrated and scaled to slow or halt the loss of momentum, and hopefully aim for maximum positive spill-over for private businesses and households, and boost sentiment.
- A healthy stock market is helpful: essential for sustained high-quality growth, advancements in technology and industry, and to diminish reliance on bank financing. The valuations of the stock market affect the wealth of households. The sustainability of China's pension system, already pressured by a growing elderly population, depends on the appreciation of equity values, especially as the percentage of the population aged 60 and above sees a notable rise. However, this is less a function of asset prices and rather contingent on improving corporate governance standards, which improve investor confidence in the quality of listed companies, making the market more attractive to both domestic and foreign investors.
- The global economic context doesn’t help: global growth is expected to slow down in 2024, with a potential recovery later in the year; central banks, especially the US Federal Reserve, may cut interest rates later and by less than expected, and global political instability, including numerous domestic elections and US-China tensions, adds to the uncertainty in the markets.
- China's economic growth is expected to continue sliding without last year's supportive base effects, and markets will watch carefully as policymakers set a growth target and policy focus at the National People's Congress in March.