In Depth: Stimulus Drives China’s Biggest Stock Surge Since 2008, but Analysts Fear It Might Fizzle

China’s A-share market saw a notable upsurge due to a series of stimulus measures unveiled last week, though experts caution that sustained growth depends on deeper economic interventions, particularly in the real estate sector [para. 1]. On September 24, the Shanghai Composite Index jumped by 2,863.13 points following the announcement of a policy package by heads of key financial regulatory bodies during a State Council press conference, marking its best single-day performance since July 2020 [para. 2]. The package included new monetary tools aimed at bolstering the stock market, long-term capital inflows, and facilitating mergers and acquisitions [para. 3].

The positive momentum extended into the following days, with September 25 seeing a trading volume exceeding 1 trillion yuan ($143 billion) for the first time since May [para. 4]. The unusual prioritization of macroeconomic matters by China’s Politburo on September 26 signaled urgency in stabilizing the economy [para. 5]. This spurred foreign capital inflows into China’s A-shares, causing technical issues on the Shanghai Stock Exchange due to high demand. Prominent Wall Street investor David Tepper expressed a bullish stance on Chinese stocks during this period [para. 6].

The CSI 300 Index rose more than 15% last week, its largest weekly gain since 2008, with the Shanghai Composite Index and Shenzhen Component Index also showing significant increases [para. 7]. Yet, experts warn that this rally may not endure without broader economic reforms, particularly within the real estate sector [para. 8].

Pan Gongsheng, governor of the People’s Bank of China (PBOC), announced a 500-billion-yuan ($71.2 billion) swap facility and a special refinancing tool during the September 24 press conference [para. 9]. The swap facility is designed to enhance liquidity and trading by enabling institutions to pledge assets for liquidity. In contrast, the special refinancing tool offers loans at 1.75% interest, aimed at supporting stock buybacks [para. 10]. While some optimism exists around these measures, experts highlight that willingness to invest remains a challenge, not access to low-cost capital [para. 11].

The discussion around a government-backed stabilization fund to directly buy stocks intensified after the September 24 press conference, with the PBOC governor confirming its consideration [para. 16]. Similar funds in other countries have successfully stabilized markets temporarily, though their long-term efficacy remains debated [para. 17][para. 18]. Analysts argue that the fund's structure should avoid moral risks and suggest purchasing broad-based ETFs to maintain market integrity [para. 19]. Prolonged use could distort the market, warned Soochow Securities analyst Tao Chuan [para. 20].

Additional measures included promoting mergers and acquisitions (M&A) among listed companies, as revealed by CSRC Chairman Wu Qing [para. 24]. Despite these efforts, M&A activity witnessed a 28.5% drop in the first half of 2024 compared to the previous year [para. 25]. The new measures aim to alleviate barriers and regulatory delays to cross-industry mergers and cross-border deals [para. 26][para. 27].

China’s capital market grapples with insufficient long-term funds, as reflected by the low equity involvement of insurance industry funds and wealth management products [para. 28]. CSRC Chairman Wu highlighted the need for long-term capital at the September 24 press conference, followed by the release of guidance to promote medium- and long-term capital flow into the market [para. 29]. Despite initiatives, insurance companies have been slow to increase equity exposure [para. 30]. Joint efforts by insurance giants have directed substantial funds into the stock market, with further plans to expand long-term investment reforms [para. 31][para. 32].

Contact reporter Denise Jia (huijuanjia@caixin.com) for more information [para. 33].