Beijing’s pledge to ‘boost the economy’ acknowledged investors’ top concerns—and sent Chinese stocks soaring
Stock prices in Hong Kong and China’s mainland soared Wednesday after China’s State Council promised to shore up the nation’s wobbly financial markets by easing a regulatory crackdown on technology companies, providing new support for property developers, and boosting the broader economy.
China’s benchmark CSI 300 Index gained 4.3%. Hong Kong’s Hang Seng Index jumped 9.1%, its best day since the 2008 global financial crisis, while the Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, surged 12.5%. The share prices of China’s two largest internet companies, Alibaba Group Holding and Tencent Holdings, shot up more than 20%.
The rally followed a report from China’s official Xinhua news agency on a Wednesday meeting of the China Financial Stability and Development Committee (FSDC) led by Vice Premier Liu He. The FSDC is China’s most powerful financial policy body. Liu is the nation’s senior economic planner and a direct adviser to President Xi Jinping.
The committee exhorted all government departments to “actively introduce policies that benefit markets,” according to the report, and agreed that there was an urgent need to “boost the economy” in the first quarter of 2022.
The report didn’t specify what actions the government would take to achieve those aims. But a statement attributed to the committee promised new policies to support China’s debt-addicted real estate developers, and hinted that securities regulators in the U.S. and China are close to resolving differences on accounting and disclosure requirements that threaten to force hundreds of Chinese companies to delist from U.S. exchanges.
The group also promised relief from the regulatory crackdown that has hobbled the operations of Alibaba, Tencent, and other Chinese internet giants over the past two years. The committee agreed that “rectification of the major platform companies” should be completed “as soon as possible,” according to the report.
Notably, the committee seemed to acknowledge and address a key criticism leveled by some Western analysts of China’s economy over the past year: that while there may have been merit to China’s stricter regulatory and economic policy initiatives on a case-by-case basis, China’s leaders were paying too little attention to the interactive dynamics of the new policies or how, in aggregate, those policies destabilized China’s financial markets and hindered economic growth.
The FSDC report affirms that “any policy that has a significant impact on capital markets should be coordinated with financial management departments in advance to maintain the stability and consistency of policy expectations.”
The FSDC’s effort to underscore its support for China’s financial markets comes amid mounting signs of those markets’ vulnerability—and that of the nation’s broader economy. In the previous two days of trading this week, exchanges in Hong Kong, Shanghai, and Shenzhen surrendered a staggering $1.5 trillion as investors agonized over surging COVID case counts in mainland cities, the risk that China could be targeted for additional U.S. sanctions against Russia, and the prospect that the U.S. Federal Open Market Committee (FOMC) will begin raising interest rates for the first time in five years when it meets Wednesday.
China is in the throes of its worst COVID-19 spike since the initial outbreak of the virus in Wuhan in early 2020, with the nation’s daily case count surging into the thousands, up from single or double digits as recently as a week ago. On Wednesday, China recorded 3,054 new cases of the virus, down slightly from 5,280 cases on Tuesday, with significant outbreaks in Shanghai as well as the crucial manufacturing hubs of Shenzhen, Dongguan, and Changchun.
Chinese officials have responded to those flare-ups by doubling down on their policy of “dynamic COVID zero,” which involves strict travel bans and, in some cases, citywide lockdowns. This week China has placed 51 million people in lockdowns in the government’s largest containment effort in two years. China’s main ports remain open, but the lockdowns are roiling supply chains and dampening domestic consumption. It’s not clear China will prevail this time against the Omicron strain, which is many times more transmissible than previous variants.
Conflict in Ukraine
Russia’s invasion of Ukraine also has battered China’s economy. The most immediate shock has been oil prices, which have shot up by more than a third since the invasion began. China imports more than 10 million barrels of oil per day, more than any other economy in the world.
But China’s larger fear is that, because of China’s close diplomatic relations with Russia—a partnership Chinese President Xi Jinping upgraded with great fanfare only a month ago—China could become entangled in Western sanctions targeting Russia. For China, the stakes are huge. The U.S. and European Union are far more important trade partners for China than Russia, and while China imports energy and agriculture products from Russia, the country is far more dependent on the West for advanced technologies including semiconductors.
Rising interest rates
The FOMC is widely expected to begin raising interest rates at Wednesday’s meetings to counter inflationary pressures from the pandemic and rising oil prices. Goldman Sachs expects the Federal Reserve to approve seven rate increases this year. China is expected to offset tighter U.S. monetary policy by lowering interest rates at home. But so far China’s central bank has done so at a pace much slower than many expected. Global investors were disappointed with the People’s Bank of China keeping the rate on its one-year medium-term lending facility unchanged on Tuesday.
Until the Wednesday meeting of the financial stability committee, Chinese regulators had shown few signs of relenting on their crackdown on China’s largest internet platforms; if anything, many analysts expected China’s tech blitz to get worse. JPMorgan Chase this week downgraded 28 Chinese internet stocks including Alibaba, Tencent, and Meituan to underweight, calling them “uninvestable” over the next six to 12 months because of geopolitical risks related to the Ukraine conflict as well as continued regulatory pressures at home.
Historically, China’s leaders have shown far less concern about investor losses in their equity markets than have their American counterparts—particularly if those investors are foreigners. And Xi has seemed far more willing than his predecessors to prioritize order and control over economic growth.
But in recent weeks, as risk factors multiplied, a flurry of economists have marked down their projections for growth of China’s GDP in 2022, with many pegging expansion for the year well below China’s official target of 5.5%. Morgan Stanley, for example, cut its first-quarter growth forecast for China to zero and lowered its 2022 full-year forecast to 5.1%. “The double lockdowns [in Shenzhen and northern Jilin province] sent a clear message that Beijing is prioritizing COVID containment over the economy,” Morgan Stanley economists, led by Robin Xing, wrote in a note to clients.
Retail sales and industrial output improved in January and February, according to data released Tuesday by China’s National Bureau of Statistics (NBS). That offered some grounds for optimism, but not enough to offset the overall market gloom.
Meanwhile, China’s property sector remains in the doldrums. NBS data show new home sales sank 22% in the first two months of 2022 compared with the same period a year earlier.
China’s central bank and banking regulatory agency chimed in with public statements of support Wednesday for the conclusions of the FSDC. Investors, at least for now, have interpreted the combination of statements as a signal that China’s top leaders are united in their determination to do whatever it takes to shore up the stock market and economy.
But it remains unclear what steps the financial stability committee will take to back its commitment to markets and growth—and whether the committee’s declaration signals a larger “course correction” of Xi’s economic agenda of the past two years, or is mainly a rhetorical gesture meant to soothe investor panic.
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