China's long stumble

Stock market decline an opportunity for other developing nations

Most of the time, rumours of a $278 billion capital infusion into a stock market would send shares soaring. Not so in 2024 China, however. Even after Premier Li Qiang called for “forceful steps” to prop up the country’s economy — and despite the news that billions might be funnelled from state-owned enterprises’ overseas accounts into equities — Chinese stock indices rose by just a couple of percentage points. Given that the benchmark CSI 300 Index for mainland stocks had fallen to a five-year low, this was not exactly seen as a recovery. In fact, rather than restoring some dynamism to Chinese markets, this seemed to confirm the widely held suspicion that a fatal loss of confidence had taken hold. There is a near-consensus that the country’s robust growth of decades has reached an end, and that the government in Beijing has neither the tools nor the inclination to change that. This is fundamentally different from the earlier claims of China being close to a crisis or collapse of one or another sort. No collapse is foreseen; it is merely a slow-moving constriction driven by a real estate market that seems impossible to reform, and local-government debt that may be difficult to restructure.

Official data coming out of China in the past few days has been disquieting. A broad indicator of prices revealed that deflation might have set in; the price of residential real estate fell the most in nearly a decade. And while China met its official gross domestic product growth target of 5.2 per cent in 2023, the yuan’s loss in value meant that the dollar value of China’s national output shrank for the first time in decades. When the fundamentals are weakening, investors look for signs of policy support. In this case, a cut in interest rates might have helped stabilise the property market. But the People’s Bank of China refused to lower borrowing costs earlier this month. That might have been because the difference between lending and borrowing rates necessary to keep banks afloat was already at the minimum. President Xi Jinping, meanwhile, clearly seemed far more focused on political issues like elections in Taiwan than on addressing the fears about China’s economic future. Taken together, most investors concluded that there were too few growth drivers within the Chinese economy.

Since hitting a peak early in 2021, the Chinese stock market has seen a drop of $6 trillion in market capitalisation — from $20 trillion to $14 trillion. Worse, investors seem convinced that this is not even a major concern for the leadership in Beijing. The government, increasingly driven by old-style statist ideology, sees financialisation as inherently dangerous — because it reduces the level of the Party’s control over the private sector. Few expect a return to overall growth and market rallies in China in the short term, or even the medium term. For other emerging markets, including India, meanwhile, an interesting phenomenon has emerged: A decoupling of investors’ expectations from what they predict for China. For the past year or more, Chinese stocks have been declining, while other emerging markets have been on an upward path. This is the first time in two decades that such a divergence has been seen. In China’s stumble lies an opportunity for other developing nations.