6,000 Billion Dollars Lost in 2 Years: China’s Stock Markets Are in the Doldrums.
Explanations for a situation that is set to continue into 2024, and whose main beneficiary is likely to be neighboring India.
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The Chinese economy has disappointed once again in 2023. More and more economists are becoming pessimistic about China's prospects for the coming years, and are questioning a truth that seemed a foregone conclusion before the COVID-19 pandemic: China will have a hard time dethroning America as the world's leading superpower in the decades to come.
In addition to the Chinese economy, which Xi Jinping is unable to revive, the entire Chinese equity market is in the doldrums.
Quite simply, in the space of two years, over $6,000 billion in value has disappeared!
In an attempt to stem this colossal fall, the Beijing authorities have decided to ban short selling, while announcing a colossal rescue plan worth $278 billion.
I attempt to explain this Chinese disaster.
It all started a few days ago when Citic Securities, China's largest state-owned broker, suspended short selling for certain clients. Other brokers banned the use of margin loans for short selling.
It has to be said that Xi Jinping and the Chinese Communist Party have a lot to worry about, given that more than $6,000 billion has been lost since the peak of 2021:
Many experts are perplexed by Beijing's decision, as historically, such restrictions have never given equities a sustainable boost. Studies even show that such bans can harm market liquidity.
But Beijing had to react, as short-selling is frowned upon in China since it generates profits at the expense of others. Beijing also took this decision to close a loophole exploited by strategic investors.
Besides, state-owned funds have increased their stakes in major Chinese banks:
The Chinese authorities are considering a series of measures to stabilize the stock market. Nearly 2,000 billion yuan could be mobilized, mainly from the offshore accounts of Chinese state-owned companies. This represents a fund of $278 billion that would be invested directly in the Chinese economy through share buy-backs.
The table below shows some of the companies expected to be affected by Beijing's colossal rescue plan:
Such an injection of fresh money into China's leading companies could temporarily stabilize the market. In the long term, however, we doubt the success of such an operation.
Indeed, this money will not be enough to reverse what is weighing on the Chinese economy, and by extension on Chinese markets: the real estate crisis, consumer sentiment, or even foreigners who are turning away from China for other, more clement climes in Asia.
And you immediately thought of India here...
The figures confirm the flight of foreign capital from China:
Already weakened, the yuan is suffering greatly from this situation. That's why Chinese officials are seeking to use offshore money for this rescue plan. Everything must be done to minimize the impact on the yuan.
In any case, the stock market crisis continues to put pressure on certain derivatives linked to Chinese assets, including the CSI Smallcap 500 index, which lost almost 5% on Monday, January 22, 2024.
For the time being, it's hard to know whether China will be able to stabilize this endless slide in the equity markets, although the authorities seem prepared to use any means necessary to do so.
We'll have to keep a close eye on this situation in 2024, but also on the rise of the Indian equity market, which is benefiting greatly from the Chinese situation. India is an imperfect democratic model, but it's a democracy, and that's something Western investors look for when directing their investment flows.
At this rate, the crossing of the curves between America and China will never happen...
The stock market always leads the economy. What's going on in China reflects that nothing good is going to happen to the economy anytime soon. I agree that the buybacks won't stabilize the Chinese stock market in the long run.