A Wild Week for Chinese Equities

Summary

• China’s pledge to support financial markets earlier this week triggered a sharp recovery in its distressed equity markets.
• Ongoing uncertainty over tech regulation, the latest Covid lockdowns and worries over China’s relationship with Russia leave risk of further near-term volatility.
• But the common prosperity goal and a focus on stability ahead of this year’s party congress should ensure sufficient policy support comes through.

Ongoing Regulatory Uncertainty and Worsening Macro Hammer Chinese Stocks

Recent swings in Chinese stocks have been unprecedented. The Hang Seng China Enterprises Index dropped almost 15% through Monday-Tuesday, taking the YTD decline to 25.6% (before Wednesday’s turnaround). It left the index trading at its lowest level since the Global Financial Crisis. Swings in the Nasdaq Golden Dragon Index (which tracks Chinese stocks listed in the US) have been even larger. The index dropped over 30% between 10 and 14 March, with a subsequent 32.9% gain on Wednesday. A wide-ranging pledge to support financial market stability was the key to the turnaround.

Last weekend’s lockdown of Shenzhen’s 17.5mn population came on top of significant restrictions in Jilin province, and increasingly so Shanghai. It deepened the equity slide at the start of the week.

But the weakness had been going on for some time. Quashed hopes that China had reached peak regulation was the main reason, with new guidelines announced in mid-February cutting fees for food delivery platforms. Hong Kong-listed Meituan shares drop 18% on the news, while other stocks suffered on concerns of more to come. US-listed Didi also suffered a 44% drop earlier this month as work on its move to a Hong Kong listing was put on hold following what was deemed insufficient progress on data security.

Last year’s sweeping crackdown on education and tech companies had led to discussion over the future of China’s private sector, and whether stocks remained investable. Our view was that the measures, while poorly communicated, were part of the broader effort to rein in rising inequality, anti-competitive behaviour and worries over data privacy. China’s ‘Common Prosperity’ goal does not exclude the private sector. But the authorities have made it clear that this will not come at the risk of instability.

Wednesday’s Policy Response Triggers a Bounce, For Now 

Wednesday’s policy response is a strong signal of limited tolerance for further declines in equities. Coordinated statements from the vice premier, PBoC and banking regulator are highly unusual. And while lacking in detail, they did address most of the big issues in China. Pledges included ensuring financial market stability, supporting overseas stock listings, limiting the risks around the property sector, and ending the regulation of platform companies ‘soon’.  

Despite the lack of detail, the statements triggered a significant rally in stocks. The Hang Seng China Enterprise Index gained 21% over Wednesday and Thursday while the Nasdaq Golden Dragon Index surged by more than 30% on Wednesday. Reports of concession on audit rules also helped.

A desire for stability ahead of the 20^th CPC Congress later this year and the ambitious 5.5% GDP growth target are significant reasons to expect the authorities will deliver. And China is already easing policy. Fiscal loosening is already underway with reduced fees/taxes and increased investment. Credit easing is evident through the turnaround in the credit impulse and partial rollback of some macroprudential tightening in the property sector. Meanwhile, interest rate and reserve requirement cuts have come on the monetary policy side.

New policies to fulfil this week’s statements of support will be closely watched. Measures such as restoring the main Didi apps, resuming the Ant IPO and allowing the listing of Bytedance are far from guaranteed in the near term. But further broad market weakness is likely contained.