China Hit With $7 Trillion Stock Rout Despite CCP Interventions

An investor looks at a screen showing stock market movements at a securities company in Hangzhou, in eastern China's Zhejiang province, on Feb. 8, 2024. (STR/AFP via Getty Images)

China’s economic landscape has faced considerable challenges over the last year, with disappointing economic indicators further dampening investor sentiment. The CSI 300 Index, a barometer of the Chinese stock market’s health, has plummeted over 40 percent since its peak in 2021, while the Hang Seng China Enterprises Index has seen a staggering decline of more than 50 percent.

Consequently, the stock markets in Hong Kong and China have witnessed a loss of approximately $7 trillion in value. Despite the Chinese Communist Party’s (CCP) concerted efforts to stabilize the market, the persistent downturn in A-shares remains unabated, signaling potential economic turbulence ahead.

As the nation commenced its Lunar New Year celebrations, securing stock market stability emerged as a paramount concern for the CCP. Chinese leader Xi Jinping has reportedly taken a personal interest in orchestrating rescue operations, marking his involvement for the second time since his review of the People’s Bank of China and the State Administration of Foreign Exchange in October of the previous year. This move is widely interpreted as an indication of the critical nature of the regime’s market stabilization endeavors.

CCP Measures Fall Short in Stabilizing A-Shares

Before the disclosure of Xi’s decision to engage directly in market stabilization efforts, the state had already been actively attempting to invigorate the market. This included a significant injection of capital into state-supported entities such as insurance companies, pension funds, and the sovereign wealth fund of China.

Data from S&P Global Market Intelligence ETP indicates that in the month leading up to Jan. 26, over $17 billion was channeled into four exchange-traded funds (ETFs) in China that mirror the performance of the CSI 300 Index. Goldman Sachs highlighted that this influx to domestic ETFs was the most substantial since 2015.

Research from Z-Ben Advisors revealed that on Jan. 22, China’s five largest ETFs experienced a record net inflow of $5 billion, indicating a strategic accumulation of ETF shares the week prior.

Further CCP actions included bolstering shareholdings through Central Huijin Investment, a Chinese state-owned sovereign fund, in key financial institutions and imposing a ban on short selling. On Feb. 6, Central Huijin affirmed its commitment to enhancing its shareholdings in ETFs, aiming to support the stable operation of the capital market vigorously.

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The China Securities Regulatory Commission (CSRC) announced on Feb. 5 its intention to intensify market monitoring and collaborate with the Ministry of Public Security to counteract market manipulation and short selling. The CSRC also plans to facilitate the entry of long-term investment funds into the market, emphasizing the role of institutional investors in fostering market stability.

Goldman Sachs estimates that these measures have led to the purchase of roughly 70 billion yuan ($9.7 billion) in domestic stocks over the past month, although the specifics of this calculation were not disclosed.

Despite these extensive interventions, the market’s response has been lukewarm, with smaller and medium-sized stocks continuing to decline, further eroding investor confidence. As of Feb. 6, the CSI 1000 Index fell by 2.3 percent in early trading, highlighting a broader market trend of declining stocks that challenges the regime’s stabilization efforts.

Multi-Trillion Yuan Effort to Stabilize Stock Markets

In the past two months, China’s National Administration of Financial Regulation has held over a dozen meetings aimed at bolstering the capital market’s stability, introducing numerous measures to mitigate the ongoing downturn in the stock market.

On Jan. 22, Chinese Premier Li Qiang led a State Council executive meeting to underscore the importance of attracting medium and long-term funds into the market, thereby reinforcing its inherent stability. He advocated for more potent and effective strategies to restore market confidence, a move analysts interpret as a direct counteraction to the market’s steep decline.

Following this, there was speculation about the regime contemplating a comprehensive package to shore up the stock market. Reports suggested the initiative to deploy approximately 2 trillion yuan ($278 billion) into a stabilization fund aimed at acquiring domestic stocks via the Hong Kong Stock Exchange, primarily using offshore accounts of state-owned enterprises.

Additionally, there was talk of earmarking at least 300 billion yuan ($42 billion) from local funds for investment in domestic stocks through state-owned entities like China Securities Finance Corporation or Central Huijin Investment Co., Ltd.

In a significant financial move, the People’s Bank of China (PBOC) announced a 0.5 percentage point cut in the reserve requirement ratio for banks on Feb. 5, effectively releasing around 1 trillion yuan ($140.4 billion) into the system. This announcement briefly spurred a rally in the Hang Seng China Enterprises Index.

Eswar Prasad, a professor at Cornell University and former IMF China division chief, pointed out that the PBOC’s decision to lower the reserve requirement ratio signals the state’s growing apprehension over the economic slowdown and the market slump.

He warned, however, that without a positive shift in business and investor sentiment toward the Chinese economy, the impact of this policy adjustment could be minimal.

In an attempt to alleviate market anxieties, the China Securities Regulatory Commission (CSRC) released a “Q&A on Stock Pledge Situations” on Feb. 5, aimed at reinforcing market confidence. The CSRC committed to mitigating stock pledge risks, advising brokerage firms and other institutions to enhance the flexibility of liquidation lines to support stable market operations.

Despite these efforts, A-shares experienced a brief rally before closing lower, with the Shanghai Composite Index marking its sixth consecutive decline for the first time since the previous April, and settling at a four-year low. Similarly, the Shenzhen Component Index and Hong Kong stocks ended the day in the red.

Following the market’s close, the CSRC issued three additional statements in a single day, totaling four declarations aimed at market support.

Chinese state-owned investment bank CITIC Securities, reflecting on the situation, noted that A-shares have entered a negative liquidity spiral, attributing the downturn not to the fundamentals of the Chinese economy or external pressures but to a degradation in the trading ecosystem. The firm emphasized the necessity for robust external intervention or concrete policy shifts to rejuvenate market confidence.

‘Perfect Economic Storm Hitting China’

In a recent statement, Federal Reserve chairman Jerome Powell highlighted the challenges facing China’s economy, noting a significant shift in its growth dynamics. Mr. Powell observed a departure from a market-driven growth model to one that increasingly relies on state-owned enterprises. He also pointed out the Chinese economy’s excessive dependence on real estate investment as a potential vulnerability.

Adding to the concerns, Kyle Bass, the founder and chief investment officer of Hayman Capital Management, a Dallas-based hedge fund, expressed alarming forecasts regarding China’s economic future in an interview with The Epoch Times’ American Thought Leaders program.

Mr. Bass, known for his accurate prediction of the 2008 U.S. subprime mortgage crisis, is also a founding member of the “Committee on the Present Danger: China.” He raised red flags over the extent of exposure Chinese and Hong Kong banks have in the real estate sector, estimating that one-third to 45 percent of these banks’ assets are tied to real estate loans.

Mr. Bass underscored the gravity of the situation by stating, “You’ve got the perfect economic storm hitting China at a point in time where the geopolitical tensions in the world are at a multi-decade high. I think they’re in real trouble.”