The reactions on the stock markets have been immediate and spectacular. Since the beginning of last week, the so-called CSI 300 index (leading companies listed on the Shenzhen and Shanghai stock exchanges) has soared over 20 percent.
At the same time, trading on the Hong Kong stock exchange has reached record levels, where investors, according to Bloomberg, have chosen to postpone planned weekend breaks to avoid missing the upswing rally described as "an opportunity that only occurs once a decade".
Blanket Shares
Johan Larsson, chief strategist at Nordea bank, explains that the stimulus measures announced by the country's leadership have not been directly surprising – on the other hand, the scope has been.
The price surge is happening as market players who previously chose to short-sell Chinese shares are now forced to act to minimize their losses.
The effect has likely been desirable from the Chinese authorities' point of view, as they saw an opportunity to crack down on people who, in their eyes, have speculated on a continued downturn in the Chinese economy, says Johan Larsson and notes:
China's economy is not like any other economy, but rather special, not least because it is based on a growth target.
For 2024, the target is set at 5 percent. Considering the weak development of Chinese exports, question marks around household consumption, and above all the real estate sector, it is few foreign actors who have believed that this was realistic.
Johan Larsson also notes that it is uncertain whether these measures can contribute to more than just a short-term stock market upswing, i.e., be able to turn around China's entire economy, especially given the uncertainty surrounding the real estate market.
What this will do for the real economy is harder to have an opinion about. It may very well be that it doesn't solve these problems.
Rushing China Funds
Even though the stock market upswings have caused China funds that Swedes invest in to rush in recent times, the individual small investor should be aware of the challenges and uncertainty, notes Johan Larsson.
One should be aware that when the Chinese stock exchanges open again after the weekend break, it will likely swing quite heavily. The uncertainty factor here is also that you have a state actor who is buying. They can create money out of thin air.
In a short time, China's leadership has chosen to launch several economic stimulus measures, including:
Various interest rate cuts, including the seven-day reverse repo rate, which had remained unchanged for a year before the announcement.
Support purchases for the stock market.
Chinese mortgage borrowers will be able to refinance existing home loans to new lower interest rates, which was not possible before.
Lowered cash threshold for home purchases.
