China’s benchmark stock index, the CSI 300, is close to erasing all of the gains it made since a key political meeting was held in late July as the economy struggles to gain momentum and optimism over stimulus wanes. The CSI 300 fell 1.2% in early Monday trading after a 3.4% drop last week, together wiping out the bulk of the advance it had made following the pro-growth tone of the Politburo meeting on July 24. Financials led the losses amid a widening property crisis.
The post-Politburo rally has gone into reverse due to increasing signs that the recovery is losing traction, and concern that Beijing’s steps to counter the slowdown are too small and too slow. Investors have also soured on the nation’s outlook due to the troubled property sector, falling exports, deflation in both consumer and producer prices, and a slide in new yuan loans to the lowest in a decade.
Property Sector in Trouble
Adding to the jitters is news that one of China’s largest private wealth managers, CreditEase Wealth Management Co., missed payments on investment products sold to the nation’s high-net worth clients and corporations, stoking fears that more defaults may happen in such products. One of the nation’s largest developers, Country Garden Holdings Co., also unsettled markets last week amid fears of a default.
The property sector accounts for about a quarter of China’s gross domestic product and is a major source of local government revenue and bank lending. A slowdown in the sector could have ripple effects across the economy and pose financial stability risks.
Stimulus Hopes Dim
Investors are also disappointed by the lack of concrete policy measures to support the economy, despite the Politburo’s pledge to maintain stable growth and avoid “flood-like” stimulus. The central bank has kept its benchmark interest rate unchanged for 16 months and has refrained from cutting banks’ reserve requirement ratio since July.
The government has also been cautious about increasing fiscal spending, as it faces constraints from rising debt levels and shrinking fiscal revenues. The fiscal deficit widened to 3.8% of GDP in the first half of the year, while fiscal revenues grew by only 4.9%, well below nominal GDP growth of 13.5%.
Outlook Remains Uncertain
The outlook for China’s economy remains uncertain, as it faces both external and internal challenges. On the external front, China faces rising trade tensions with the US and other major partners, as well as geopolitical risks in regions such as Taiwan and Afghanistan. On the internal front, China faces structural issues such as an aging population, environmental degradation, income inequality, and regulatory tightening.
Some analysts expect China’s growth to slow further in the second half of the year, as the impact of earlier stimulus fades and new Covid-19 outbreaks weigh on consumption and travel. The median forecast for China’s GDP growth in 2023 is 8.2%, down from 8.5% in June, according to a Bloomberg survey.
