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China intervenes to counter the confidence crisis and protect the yuan

The Asian giant is facing an uncertain economic climate due to defaults by real estate and financial companies

Bolsa china
A screen shows the evolution of the main index of the Chinese stock market, in Hong Kong, on August 18.TYRONE SIU (REUTERS)
Álvaro Sánchez

The China Securities Regulatory Commission (CSRC) is moving to mitigate investor outflow. The Beijing-based agency announced Friday that it will consider increasing trading hours for stocks and bonds, reduce trading commissions, and support share buybacks to help stabilize their prices, a way of trying to encourage the arrival of capital amid growing distrust towards the economy of the Asian giant.

Beijing is grappling with a crisis on multiple fronts that has sparked a debate on whether China is facing the definitive end of an economic miracle that for decades has fueled global growth. The problems range from its powerful export machinery (shipments abroad fell by 14.5% in July, the lowest figure since February 2020), to domestic consumption — imports fell by 12.4%, and prices have entered negative territory — to the bursting of the real estate bubble after the fiasco of real estate developer Evergrande, which has filed for bankruptcy in the United States. Adding to concerns over the health of China’s once-robust bricks and mortar sector, Country Garden, one of the leading developers, is defaulting on its debt while there are grave concerns about contagion to the financial sector, with the asset management conglomerate Zhongzhi Enterprise Group also struggling to meet its commitments.

The package of measures comes in a complex environment for the country’s stock and bond markets, which have not been immune to the flood of negative news. By lifting requirements and bringing it more in line with the way Western stock markets operate, China is becoming more attractive to funds and individual investors looking to earn returns by betting on its companies. For example, favoring share buybacks can reduce stock volatility. “What should be emphasized is that activating the capital market and boosting investor confidence are complementary to each other,” a spokesman for the stock regulator said.

The announcement came just hours after the country’s central bank, the People’s Bank of China (PBOC), intervened to halt the decline of the yuan, which this week hit a 16-year low against the dollar. A few days earlier, the PBOC decided to lower interest rates to reactivate consumption after prices entered negative territory (-0.3% in the year-on-year figure for July) sounding the alarm bells over possible deflation. Specifically, the PBOC cut its one-year bank lending rate by 15 basis points to 2.5%, in the biggest adjustment since 2020. It justified this on the grounds of a need to “maintain reasonable liquidity in the banking system and meet the needs of financial institutions.”

The situation in China runs counter to what is happening in much of the rest of the world, where high inflation has been a major source of concern for two years, due to the rise in energy and food prices, and where central banks are raising rates in response instead of lowering them. The Chinese government’s approach has also been the opposite of that of the West. While restrictions due to the coronavirus pandemic were lifted in Paris, London and Washington, China maintained its zero-Covid policy for considerably longer: until January 8 of this year, quarantine was still required for international travelers.

Beijing’s zero-Covid policy weighed down its economy, but it was hoped that the lifting of restrictions would provide a boost by putting an end to the temporary closures of factories and ports that had so damaged activity. The recovery, however, is proving disappointing, and doubts are growing as to whether the country will reach its projected GDP growth target of 5% this year.

That slowdown could affect companies, but eToro analyst Ben Laidler downplays the overall impact of any problems on China’s stock market. “We are more concerned about rising U.S. bond yields and oil prices. China is an economic giant, but a relatively modest country in the capital markets. Its stocks are already among the cheapest in the world, and foreign investors are already heavily underweight. Its GDP growth is disappointing and structurally down, but it will remain one of the strongest in the world this year,” he concludes.

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