(Dr. Ching-Yu Tan, Director, Research Division IX, Taiwan Institute of Economic Research)
China has introduced a series of market rescue measures since September 24, 2024, resulting in a significant rise in the stock market within five trading days. It continued to surge for three days after the National Day Golden Week holiday until October 11 when the three major indices all fell. After the Shanghai Composite Index fell by 2.55%, the Shenzhen Component Index dropped by nearly 4%, and the ChiNext Index declined by 5%, the Ministry of Finance, on October 12, held a press conference on “Strengthening Counter-Cyclical Adjustments in Fiscal Policy” and announced the introduction of "a basket of incremental policies," including measures to reduce local debt risks and the issuance of special treasury bonds to supplement core capital. It emphasized that China’s finances will achieve a balance of revenue and expenditure and meet the annual budget goal, demonstrating its commitment to stabilize the market. However, whether China’s economy can be revitalized remans a key concern globally.
Since China relaxed its zero-COVID policy, the three drivers of economic growth, namely consumption, investment, exports, are all facing challenges, together will three major internal risks. First, the annual growth rate of retail sales of consumer goods has slowed from a peak of 18.4% in April 2023 to 2.1% in August this year, approaching the levels seen during pandemic lockdowns. Second, China’s investment environment has been continuously affected by the US-China trade war, the technology war, and the pandemic. In addition, the sluggish real estate market and weak domestic demand in 2023 have led to the withdrawal of foreign capital, with the actual use of foreign capital in the first 8 months of 2024 significantly declining 31.5% compared to the same period last year. Moreover, due to the impact of US-China competition and the US-Mexico-Canada Agreement in 2023, China has lost its position as the largest import region for the US, resulting in a 4.6% decline in annual exports. Though the export value has turned positive with a growth of 4.6% in the first 8 months of 2024, the new export orders have remained under the threshold for 5 straight months and the new export orders index in September 2024 was only 47.5, indicating weakness in exports.
China is simultaneously facing three major risks: real estate, local government debt, and small and medium-sized financial institutions internally. In the first 8 months of 2024, the national real estate development investment declined by 10.2% compared to the same period last year. During this time, the annual growth rate of funds available to real estate developers and sales of newly constructed commercial housing significantly dropped by 20.2% and 23.6% respectively, while the annual growth rate of unsold housing area increased by 13.9%, indicating that the real estate market remains sluggish and stagnant. In terms of local government debt, according to the “Report on the Management of Government Debt for the Year 2023 by the State Council” on September 10, 2024, the government’s statutory debt balance has reached 70.77 trillion RMB, with the local government’s statutory debt balance accounting for as much as 40.74 trillion RMB as of the end of 2023. Revenue from the transfer of land use rights, a primary income source of local government, has decreased annually since 2021. In the first 8 months of 2024, the revenue amounted to only 2.02 trillion RMB, a decline of 25.38% compared to the same period of the previous year.
China’s three economic drivers are malfunctioning, concurrently with three major internal risks, causing global investors to step back and watch and Chinese consumers to be cautious in their spendings, and further leading to the challenge of deflation. In August 2024, the annual growth rate of China’s Consumer Price Index (CPI) was only 0.6% and its Producer Price Index (PPI) declined by 1.8% compared to the same period, highlighting its weak domestic demand. If price continues to fall, it will not only threaten China’s economic growth prospects but also further squeezes corporate profits, bringing more uncertainty to long-term development.
The above-mentioned economic challenges are the primary reasons for China’s series of market rescue measures. The initial step focuses on restoring confidence through synchronously lowering interest rates and reserve requirement ratios, announcing the reduction of down payment ratios for mortgages, and allowing listed companies to obtain financing specifically for stock market investment, thus initially boosting the stock market. The measures introduced on September 24 include: First, reducing the reserve requirement ratio by 0.5% to 6.5%, which is expected to inject 1 trillion RMB in long-term liquidity into the market, and lowering the 7-day reverse repo rate from 1.7% to 1.5% to drive the market benchmark interest rate downward. Second, announcing the reduction of down payment ratio for mortgage. The minimum down payment ratio for second home mortgages was lowered from 25% to 15%. Third, facilitating listed companies in obtaining financing from the central bank and commercial banks, specifically for stock market investment and treasury shares repurchases.
On September 25, the “Opinions on implementing the Employment-Frist Strategy to Promote High-Quality and Full Employment by the State Council” was issued. It mentioned the hope to address the current severe unemployment situation through market adjustment following the revitalization of the economy. In the Central Political Buro meeting of the CPC held on September 26, it repeated the efforts to boost capital market and achieve the annual economic growth target of 5%, reassuring the government’s commitment to revitalize the economy.
In terms of stock market performance, China’s series of market rescue measures have preliminarily succeeded in attracting international and domestic capital injections into the stock market, significantly boosting the investor confidence. This wave of market rescue measures has led to a peak increase in China’s stock market on October 10, with the Shanghai Composite Index rising by 20.12% and the Shenzhen Component Index increasing by 29.54%. During the National Day Golden Week holiday market closure, the market rescue measures continued to drive the Hong Kong stock market upward, reaching a new high on October 7. The Hang Seng Index, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index had rose by 26.59%, 30.39% and 45.65%, respectively. It clearly demonstrates that the recent market rescue measures have boosted investor confidence for the future development of the stock market, thus stimulating market activity. The current market pullback also helps attract investors to inject new momentum into the long-underperforming stock markets in China and Hong Kong.
Looking forward, the recent market rescue measures have successfully restored investor confidence in the financial market, but the challenges facing China’s economy remain significant. It requires consistent and strong commitment to support the market to navigate through the crisis. Domestically, it takes time to clear real estate inventory and address the potential risks related to local government debt and the interconnected risks with small and medium-sized financial institutions. Currently, China is using of issuance of ultra long-term special government bonds and consistent interest rate cut to provide sufficient liquidity, together with the approval of “Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-Style Modernization” by the Third Plenary Session to conduct tax reform, improving local finance, as well as implement financial reform, preventing financial crisis. It also directly refers to the cancellation of housing purchase restrictions, accelerating the clearance of real estate inventory. However, it remains to be observed whether concerns can be alleviated for house-buying to gradually restore market activity.
The U.S.-China trade war and technology war have triggered an outflow of foreign capital, and the performance of exports, consumption, and investment—the three driving forces—has also been significantly affected, leading to a reduction in job opportunities. In face of these challenges, China is actively leveraging its economic scale to attract investments through events such as the Canton Fair, the China International Fair for Investment and Trade, the China International Fair for Trade and Service, the China International Import Expo, the China International Consumer Products Expo, and the China International Supply Chain Expo, aside from developing new quality productivity breakthroughs in key technologies. However, it remains challenging whether these efforts can truly reverse the situation. The European Union Chamber of Commerce in China mentioned in the Business Confidence Survey 2024 on May 10, 2024, that the proportion of European companies surveyed that may consider increasing investment, under more relaxed market access, has significantly dropped by 10% to 53%. It reveals that even if China opens up and improves its investment environment with proactive efforts in the future, it is not an easy task to rapidly attract investments back to China. As US-China competition continues, how to expand exports while reducing trade frictions and reigniting investor confidence in the market will be a critical challenge for China to confront.
（Translated to English by Tracy Chou）
