Chinese officials have recently implemented unconventional and more forceful strategies to address the waning confidence in their struggling economy. Although stocks seem to be recovering, sustaining this growth will require policymakers to take further action.
As discussed two weeks ago, the decline in the Chinese market is likely to prompt Beijing to adopt more measures to stabilize the economy. Prior to Monday’s announcement, China’s benchmark CSI 300 index had experienced a 4% decline since the beginning of the year. However, news broke that the government is reducing the tax on trading for the first time since 2008 and intends to restrict the number of initial public offerings to prevent it from diverting investor interest away from other stocks.
To be more specific, Beijing is reducing the duty on stock purchases by 0.05 percentage points (from 0.1%) and lowering the minimum margin ratio for financing stock purchases from 100% to 80%. Analysts at Gavekal Dragonomics describe these measures as “relatively aggressive tools,” indicating officials’ concern over recent market weakness. However, they note that the reaction to these measures has been somewhat muted compared to previous instances.
On Monday, the Shanghai Composite Index closed with a modest increase of just over 1%. This is in stark contrast to 2008 when similar measures resulted in multiple days of 9% gains.
In a client note released on Monday, analysts highlighted that a sustained market rally is improbable without substantial stimulus to strengthen economic growth and stabilize the property sector. Past stamp-duty reductions and pauses in new listings have only created temporary market boosts, failing to bring about fundamental turnarounds. The market rally observed in 2008 occurred when there was a significant improvement in the economic growth outlook late that year.
Currently, investors are seeking additional measures to restore confidence and address the growing perception that Beijing is constrained in its efforts to implement stimulus due to issues like debt, long-term challenges such as geopolitics and a declining population, as well as an ideological aversion to providing direct consumer stimulus.