China marked the start of the Year of the Dragon over the weekend after a week of market turmoil reflecting global concerns about the state of the world's second-largest economy. Chinese stock markets rose sharply during the week on a flurry of government action but the overall economic picture remains bleak.
Stocks in China and Hong Kong have lost $7 trillion, a third of their value, since peaking in 2021, with foreign investors wary of the recent rally. At a recent Goldman Sachs conference in Hong Kong, four in 10 investors said Chinese stocks were „uninvestable”.
The stock market plays a much smaller role in China's economy than in the United States, and foreign investors play only a small part in it. But the rapid sell-off in recent weeks has been serious enough to prompt Beijing to take measures to arrest it.
These include instructing state-backed investors to buy shares in Chinese stocks and restricting short-selling. The head of the country's Securities Regulatory Commission was sacked on February 7. The moves signaled investors that Beijing was ready to take more action to support markets, pushing major indexes to record highs. But authorities need to do more to address the underlying problems undermining investor confidence.
The recovery that followed the lifting of zero-covid restrictions by the end of 2022 was weaker and shorter-lived than expected and after a brief surge in spending, consumer confidence evaporated. Much of the problem lies in the lingering crisis in China's property market, which has pushed some of the country's biggest developers to the brink of bankruptcy and impacted local government.
Falling asset prices have made consumers more cautious, postponing purchases in anticipation of lower prices, fueling deflation. As Chinese consumers save more than they spend, the country's manufacturers need to export more to support growth, but they now face a more unfriendly environment than ever, especially in the US and the EU. The European Commission is investigating Chinese subsidies for electric vehicles, and Donald Trump has threatened a 60 percent tariff on all Chinese imports if he returns to the White House.
The government's response to the property crisis is uncertain and Xi's focus on national security has worried investors as he has used the state's coercive power to clip the wings of high-flying entrepreneurs. The lifting of zero-covid restrictions overnight shows how bold Beijing can act when policy no longer works; A similarly dramatic reset may now be needed to restore confidence and get the economy moving again.
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