China announces $278 billion package to boost its stock market amid turmoil

China has announced a massive package of measures to support its stock market, which has been battered by a series of shocks, including the property crisis, the regulatory crackdown, the Covid-19 pandemic, and the geopolitical tensions with the West. The package, worth about 2 trillion yuan ($278 billion), aims to stabilize the market and restore investor confidence, according to Bloomberg News.

The package consists of two main components: one involving offshore funds and the other involving local funds. The offshore component involves mobilizing about 2 trillion yuan from the accounts of Chinese state-owned enterprises (SOEs) that are based overseas, and using them to buy shares onshore through the Hong Kong exchange link, which allows cross-border trading between the mainland and Hong Kong markets. The local component involves earmarking at least 300 billion yuan of funds from state-owned financial firms, such as China Securities Finance Corp. or Central Huijin Investment Ltd., and using them to invest in onshore shares.

The package is expected to have a significant impact on the Chinese stock market, which has been one of the worst-performing in the world in the past year. The benchmark CSI 300 Index, which tracks the largest and most liquid stocks in Shanghai and Shenzhen, has plunged more than 20% from its peak in February 2021, reaching a five-year low this week. The Hong Kong Hang Seng Index, which also reflects the performance of Chinese companies, has dropped nearly 14% in 2023, making it the worst-performing major Asian stock market.

The package is also seen as a response to the call by Premier Li Qiang, who urged for “more powerful and effective measures” to stabilize the market and confidence during a state council meeting on Monday. Li said that the government would enhance the consistency and coordination of its macro policies, consolidate the economic recovery, and promote the healthy development of the capital market.

The package follows a series of previous attempts by the Chinese authorities to prop up the market, which have had limited success. These include cutting taxes and fees, easing monetary policy, relaxing margin financing rules, encouraging mergers and acquisitions, and launching new investment products. However, these measures have been overshadowed by the deeper structural and cyclical challenges facing the Chinese economy and market, such as:

• The property crisis, which has triggered a wave of defaults and bankruptcies among developers, lenders, and local governments, and has dampened the demand and confidence of consumers and investors.
• The regulatory crackdown, which has targeted various sectors, such as technology, education, entertainment, and gaming, and has imposed stricter rules on data security, antitrust, and social responsibility, and has eroded the profitability and valuation of many companies.
• The Covid-19 pandemic, which has disrupted the supply chains and trade flows, and has forced the government to impose strict lockdowns and travel restrictions, and has hampered the consumption and tourism activities.
• The geopolitical tensions with the West, which have resulted in sanctions, tariffs, bans, and boycotts, and have reduced the access and attractiveness of the Chinese market for foreign investors and companies.

The package is also seen as a signal of China’s determination to maintain its status as a global economic and financial power, amid the rising competition and rivalry with the US and other countries. China’s stock market is the second-largest in the world, after the US, with a total market capitalization of about $12 trillion. China also has the largest number of listed companies in the world, with more than 7,000 firms trading on its exchanges.

The package could also have some spillover effects on other markets, especially in Asia, which are closely linked to China’s economy and market. A recovery in China’s stock market could boost the sentiment and liquidity of other regional markets, and could also benefit the sectors and companies that have exposure to the Chinese market, such as technology, commodities, and consumer goods.

However, the package also faces some challenges and risks, such as:

• The feasibility and effectiveness of mobilizing offshore funds, which could depend on the willingness and cooperation of the SOEs, the availability and cost of the foreign exchange, and the regulatory and operational hurdles of the Hong Kong exchange link.
• The sustainability and credibility of the local funds, which could depend on the source and allocation of the funds, the transparency and accountability of the state-owned financial firms, and the potential conflicts of interest and moral hazard issues.
• The side effects and trade-offs of the package, which could include increasing the debt and leverage of the SOEs and the government, distorting the market mechanism and pricing, and creating moral hazard and speculation.

Therefore, the package is likely to have a short-term positive impact on the Chinese stock market, but it may not be enough to address the long-term structural and cyclical challenges that the market faces. The package may also need to be complemented by other measures, such as improving the corporate governance and disclosure standards, enhancing the market regulation and supervision, and fostering the innovation and competitiveness of the Chinese companies.

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