A rally went up on a whim for most of last year, which began as China’s stock market in 2024 but lost steam over the lack of further big stimulus beyond the initial back-to-back moves by the government. There, optimism surrounding the policy shifts by Beijing has given way to growing frustration among traders over the lack of long-term solutions for the deeper structural challenges in the economy.
Early Surge Largely Driven by Stimulus
By the last days of September 2024, the Chinese stock market had a dramatic rally after the People’s Bank of China and the central government declared large measures to support the economy. The PBOC had rolled out a series of aggressive attempts at stimulus, first by cutting the RRR for the banks, then reducing mortgage rates for existing loans. These included injection of liquidity into the system and revival of consumer spending, mainly in the still-stricken real estate sector. This facility would also introduce a 500 billion yuan facility dedicated toward promoting stock purchases by institutional investors, which indicates that the intent of the central bank is toward stabilizing capital markets.
The result was an unprecedented upleg in which the Hang Seng Index leaped 17% in September alone—the best performance since 2022. Other major indices, including the Shanghai Composite and the CSI 300, also recorded similarly spectacular gains to create an aura of hope that the long-predicted economic rebound from China was finally on its way. Domestic retail investors as well as foreign institutional funds rushed into the market, increasing trading volumes to historic highs. Combined turnover on the Shanghai and Shenzhen exchanges came to 2.6 trillion yuan ($370.6 billion) and showed rapid market activity.
Traders Hopes Dim Without More Stimulus
While the initial rally was palpable, it quickly derailed as it became clear that the central government was unwilling to make changes that were more fundamental in nature. And although the first steps taken dealt with short-term liquidity, traders and economists fear the missing effects of broad, long-term structural reforms will dampen future growth.
The big disappointment perhaps is the paucity of further fiscal stimulus packages, which many expected would address deeper problems afflicting the Chinese economy. Maybe most pressing among these is the crisis that the real estate sector is presently going through, weak consumer demand, and local government debt levels remaining as high as they are. Analysts warn that the recent market rally was largely speculative and a liquidity rush, but that it may not be sustainable without more far-reaching economic reforms.
Real estate woes and debt concerns
Perhaps the most significant challenge confronting the economy of China is its housing sector, which has been battered for years. A few measures have been taken in the form of lowered mortgage rates to calm the housing markets, but it is still saddled with a huge unsold stock. Analysts point out that if the government fails to rectify the situation either through public housing schemes or market forces, it will be a long-term drag on economic growth.
Meanwhile, local governments in China are dealing with debt levels that are extremely high and which Beijing has been very unwilling to address effectively. Many of these local authorities have relied largely on land sales for their revenues, but, as the property market has started stalling, their fiscal positions have exacerbated. Some economists believe that restructuring local government debt—even possibly in the form of special bonds—will be key to getting financial health back at the local level.
Uncertainty Going Forward
Results of all these remaining issues are leading to a slowdown in the Chinese stock market rally. While immediately after the initial burst, the CSI 300 Index fell in October when trading volumes decreased and investors took a wait-and-see attitude. The actual question remaining at present is whether Beijing will come up with measures as comprehensive as to spur long-term growth or the market will continue to stagnate without further intervention.
Global investors are also quite cautious. Some of them have been positive, like billionaire David Tepper, who believes that China is expected to bounce back as the government apparently has taken new interest in reviving the economy. However, so many of them are reluctant to put significant bets in banking on another round of stagnation in markets as the economy has no conspicuous sign of deeper structural reforms.
The Road Ahead: Structural Reforms Alone
While the short-term measures introduced by the Chinese government have pacified markets and injected liquidity, they do little for the base cause of the economic slowdown. Analysts and market experts “all agree that more meaningful reforms are needed to sustain any kind of recovery, be it revamping the fiscal-tax model, giving a heightened thrust to private enterprises, unlocking consumer spending by improving social safety nets, and ushering in hukou reforms.”
Another area is the real estate sector, which has been and continues to be a drag on the economy; the unsold housing inventory needs more targeted intervention to slow down the slide in property prices.
The issues described above will stifle further stock market recovery, and the initial run could indeed prove to be short-lived.
Conclusion
The early rally of the Chinese stock market, fueled by aggressive stimulus packages, heralded widespread optimism among traders. However, disappointment and caution are brought by the absence of further major stimulus packages as well as comprehensive long-term structural reforms. Investors are now anxiously waiting to see whether Beijing will be able to continue to do enough to sustain the growth or the recent rally would fizzle out without major intervention. The stock market’s direction in the next few months will determine the course the broader Chinese economy will take. The rally, though promising, would not be sustainable without deeper reforms, and the future of China’s markets is uncertain. Hence investors and traders are hopeful yet cautious, understanding that a long-lasting recovery depends on the government’s willingness to confront the fundamental challenges facing the economy.
