China’s stock market, which recently experienced a sharp rally following monetary stimulus measures by the People’s Bank of China (PBoC), came to a grinding halt this week. The CSI Index plunged by 7.1 percent, marking its worst single-day decline since February 2020. Investors, optimistic after the PBoC’s actions, were disappointed by the absence of matching fiscal policy, leading to widespread sell-offs.
Market Rally Fueled by Expectations
At the end of September, the PBoC introduced financial market stimulus measures to combat the nation’s economic struggles. Initially, the move sent the CSI Index soaring, rising more than 30 percent in just a few weeks. Investors anticipated that these monetary moves would soon be backed by substantial government spending to further boost the economy.
However, these hopes were dashed when no significant fiscal policy was announced. The absence of concrete action from Beijing caused the market’s recent gains to evaporate overnight, with Hong Kong’s Hang Seng Index also plunging by 9.4 percent—its worst day since 2008.
- August 2023: PBoC launches monetary measures, triggering market rally.
- September 2023: CSI Index rises more than 30 percent on expectations of fiscal support.
- October 2023: CSI Index plunges 7.1 percent after no fiscal measures are announced.
In response to the market crash, Chinese Finance Minister Lan Fo’an announced an emergency briefing for Saturday, where he is expected to unveil new initiatives aimed at stabilizing growth. Analysts agree that without significant intervention, the market could experience further declines.
Economic Struggles Weigh on Investor Confidence
China’s economy has faced multiple challenges this year, including a real estate sector in decline, stagnant consumer spending, and falling industrial profits. The country is also grappling with a deflationary cycle, which has lowered growth forecasts and cast doubt on whether China will meet its official 5 percent growth target for 2023.
Zheng Shanjie, chair of the National Development and Reform Commission (NDRC), attempted to reassure markets during a press conference earlier this week. He expressed “full confidence” in meeting the growth target but did not announce any new policies, leaving investors underwhelmed. The market’s response was immediate—stocks fell sharply as investors realized that fiscal support wasn’t coming as quickly as expected.
| Index | Recent Performance |
|---|---|
| CSI Index | -7.1% (biggest fall since Feb 2020) |
| Hang Seng Index | -9.4% (worst day since 2008) |
The global investment community is now closely watching the Chinese government. Major finance houses like Goldman Sachs and BlackRock had advised clients to buy Chinese stocks, fueled by the belief that fiscal stimulus was on the way. However, the lack of action has shaken confidence, and analysts warn that continued inaction could have deeper consequences for the country’s already fragile economy.
Calls for Larger Fiscal Stimulus
The measures announced by the government so far have fallen well short of market expectations. In a bid to stabilize the economy, Beijing said it would bring forward 100 billion yuan ($14 billion) in spending initially planned for 2025, while adding another 100 billion yuan this year for key economic sectors. Additionally, ultra-long bonds will be issued to finance development projects.
But many argue these steps are insufficient. Some experts, including former officials from the PBoC, have called for stimulus measures between 1 trillion and 3 trillion yuan. There have even been calls for a 10 trillion yuan package, equivalent to around $1.4 trillion or 8 percent of China’s GDP, to effectively boost the economy.
| Proposed Fiscal Stimulus | Equivalence in USD |
|---|---|
| 1 trillion yuan | $142 billion |
| 3 trillion yuan | $427 billion |
| 10 trillion yuan | $1.4 trillion |
Without a major fiscal boost, analysts fear the market could slide into a downward spiral. Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, described the situation bluntly: “This is what happens when you feed the monster. Every day you need to increase the amount of food, or it turns against you.”
Global Implications and Investor Sentiment
The lack of fiscal action is not just affecting Chinese markets. Global financial institutions are closely tied to China’s economic health, with many relying on the country’s growth to offset weaknesses elsewhere. The sudden drop in China’s stock market triggered a ripple effect in other Asian markets, raising concerns about potential broader impacts on the global economy.
In response to the growing uncertainty, some analysts have speculated that Beijing may have walked into a trap of its own making. Christopher Beddor of Gavel Dragonomics suggested that the initial market rally may have reduced the government’s sense of urgency. “Policymakers probably did not feel a lot of pressure because of the surge in the market,” he noted, “but if markets start to slump on no news in the next few days, they will feel compelled to do more.”
Further complicating matters are tensions between China and the international community. Last week, the European Union imposed tariffs of up to 45 percent on Chinese electric vehicles, adding to trade pressures. These tariffs, set to last for five years, were imposed despite opposition from automakers within the EU. In retaliation, China has placed temporary bans on European goods such as brandy and is considering broader tariffs.
With the Chinese economy facing mounting pressures both domestically and internationally, it remains to be seen whether the government will deliver the large-scale fiscal measures needed to lift the market and stave off further declines. Investors will be watching closely as Finance Minister Lan Fo’an’s briefing approaches this weekend.
