It wasn't just in 2024 that Chinese stocks had a rough start; challenges have been looming since February 2021 when they reached their recent peak. Over the past three years, the value of Chinese and Hong Kong stocks has diminished by an amount roughly equal to twice the annual GDP of the United Kingdom, around 6 trillion dollars.
According to available data, the Hang Seng Index has dropped by 10% so far this year alone. The Shanghai Composite Index and the Shenzhen Composite Index have also declined by 7% and 10%, respectively. These staggering losses shed light on the crisis of confidence among investors regarding the country's future.
In a recent research note from Goldman Sachs, analysts pointed out that the past three years have been challenging for investors and market participants in the Chinese stock market. Currently, stocks are trading at suppressed valuations and low provisions, making it more challenging to regain trust and stability in the markets.
The challenges facing the world's second-largest economy include a record slump in real estate, economic contraction, debts, a shrinking workforce, and a shift towards policies that may impact the private sector and raise concerns for foreign companies. The collapse of Chinese stocks reflects significant economic and political challenges, prompting investors to worry about the direction of the Chinese economy.
In addition, trade tensions between the United States and China have led American investors to significantly reduce their exposure to Chinese stocks, adding more tension to the markets. These developments highlight the growing need for effective government policies to support real estate developers, stimulate housing demand to address the current real estate crisis, which lies at the heart of many economic issues in China.
What's Beijing's Solution?
Premier Li Keqiang, who chaired a State Council meeting, pledged to take measures to boost the stock market and improve liquidity, according to a Xinhua News Agency report, without specifying details of the measures. Concurrently with this commitment, major state-owned banks moved to support the Chinese Yuan to prevent the currency from depreciating rapidly amid the decline in Chinese stocks, according to Reuters.
Bloomberg reported that authorities also allocated at least 300 billion yuan (42 billion dollars) of local funds to invest in mainland Chinese stocks. Ken Cheung, Mizuho Bank's Chief Asian FX Strategist, stated, "If rumors are true, the asset purchase program could generate a substantial amount of yuan inflows." He also believes that the People's Bank of China decided not to cut interest rates to prevent further devaluation of the yuan. However, the Bloomberg report was sufficient to halt further declines in Tuesday's trading. The Hang Seng Index in Hong Kong closed up 2.6%, while the Shanghai Composite Index rose by 0.5%.
The stock market downturn has sparked popular anger on Chinese social media platforms, with many individuals calling for effective measures to stop the decline. Over 220 million individuals are invested in Chinese stocks, representing 99% of the total investor base, according to official figures, and these individuals are 99% of the total investor base.
Topics related to the "stock market downturn" and "rescuing the Chinese stock market" were trending on Weibo on Tuesday. Even prominent figures who usually speak in line with the official narrative urged Beijing to take immediate action to rescue small investors. Hu Xijin, the former editor-in-chief of Global Times, wrote on Weibo, "I feel sad about the performance of the stock market today. The continuous decline in the stock market has exceeded the stock market itself and had a negative impact on the overall economic confidence and social trust. I think this is an urgent issue that needs to be addressed to prevent financial risks and enhance social trust." He mentioned that he incurred an overall loss of over 70,000 yuan (9,857 dollars) since he started investing in the stock market last June.
