First month of 2024 marked distinctly different performances for two of the world’s largest economies. The U.S. stock market recorded gains since the beginning of the year; however, across the ocean, China’s stock market appears to be on the verge of collapse.
The previous month witnessed a significant decline in Chinese and Hong Kong stock markets, reaching multi-year lows. The loss of confidence in the world’s second-largest economy and the exodus of foreign capital were evident factors. Additionally, data revealed sluggish economic growth and a worsening real estate downturn.
On February 5, Chinese stocks experienced another volatility session after last week’s market decline. Investors were evaluating the recent commitments made by policymakers to stabilize the struggling equity market.
Worsening performance despite promised help
On February 4, the China Securities Regulatory Commission committed to preventing abnormal market fluctuations. The regulatory body announced plans to direct additional medium- and long-term funds into the market while taking strict measures against illegal activities such as malicious short-selling and insider trading.
This statement might need to be more convincing for traders who have consistently felt let down by the government’s incremental approach to stimulus. Concerns among investors revolve around a potential negative loop, wherein technical selling pressure, prompted by margin calls and the impact of escalating derivatives, exacerbates the market’s decline.
On February 5, the CSI 1000 index, an exchange-traded fund, exhibited extreme fluctuations, declining by as much as -8.7% before partially recovering to conclude with a -6.1% loss. The CSI 1000 is frequently utilized to monitor snowball derivatives, known for potential significant gains but posing the risk of substantial losses.
Could $1.4 trillion solve the problem?
China should promptly establish a stock stabilization fund to boost market confidence, aiming for 10 trillion yuan ($1.4 trillion) or more, according to Liu Yuhui from the Chinese Academy of Social Sciences.
Initially set between $300 billion and $500 billion, the fund’s size should be adjusted based on the country’s capital market value. In response to a slumping stock market, Chinese authorities are reportedly considering measures, including mobilizing around 2 trillion yuan from offshore accounts of state-owned enterprises.
Whether this is the adequate solution or the crisis will only deepen and send shocks worldwide, only time can tell. Currently, the Chinese stock market needs to be more responsive to any form of government help.
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