[Why&Next] China Launches Stock Market Boost with Triple Hurdles of 'Policy, Guidelines, and Messages'

A Flood of Positive Reports as if Planned
The Key to Restoring Trust is 'Economic Recovery'
"Sustained Rebound Difficult Without Stimulus Measures," Critics Say

The Chinese stock market, which had been repeatedly stagnant, briefly perked up amid expectations of a policy tailwind. This followed reports of the Chinese authorities considering market interventions such as large-scale fund formation and restrictions on stock sales, along with news that President Xi Jinping would personally oversee the stock market situation. Some view this as an attempt to stabilize the market ahead of the Spring Festival (Chunje, Chinese New Year). However, there are also opinions that while such moves may temporarily win back investors who had turned away due to economic sluggishness and regulatory uncertainties, the key to regaining decisive trust lies in the economy.

On the 6th, major Chinese stock indices all closed higher. The Shanghai Composite Index, which had fallen for six consecutive trading days, rose 3.23%, and the Shenzhen Composite Index climbed 5.14%, reaching its highest level in five years (1506.79). The CSI1000 Index, which focuses on small-cap stocks, surged intraday to a record high of 8.1% before closing up 7%. On the A-share market, about 3,800 stocks closed higher that day, with over 500 stocks rising more than 9%.

Trend of China CSI300 Index

The CSI300 Index, a representative benchmark index of China, rose 3.48% that day, marking its largest increase in about 15 months since November 1, 2022 (3.58%). The Hong Kong stock market also experienced a favorable breeze. The Hang Seng Index rose 4.04%, its largest gain in about six months. The Hong Kong H-Share Index (HSCEI), composed of mainland Chinese companies listed in Hong Kong, also rose 4.9%, the biggest increase since March last year.

Foreign capital, which had been continuously selling, also turned around. On that day, overseas funds investing in China A-shares through Hong Kong, so-called "northbound funds," recorded net purchases of 12.65 billion yuan (approximately 2.3321 trillion KRW). Through the Shanghai-Hong Kong Stock Connect (Hugu Tong), 6.013 billion yuan was net purchased, and through the Shenzhen-Hong Kong Stock Connect (Shen Gu Tong), 6.591 billion yuan was net purchased. The total trading volume on the Shanghai and Shenzhen stock exchanges surged by 48.9 billion yuan to 926.3 billion yuan compared to the previous trading day.

Flood of Positive Reports as if Planned... Stock Market Support 'Strength'

[Image source=EPA Yonhap News]

Prior to this, a flood of positive reports emerged in the market. According to the Hong Kong South China Morning Post (SCMP) and others, Central Huijin, an investment firm affiliated with China's sovereign wealth fund managing about $1.24 trillion (approximately 1,646.1 trillion KRW), announced that it would increase investments in China equity-linked ETFs to stabilize the capital market. The China Securities Regulatory Commission (CSRC) also expressed support for Central Huijin's plan, lending strength to the move. However, specific investment amounts were not disclosed.

On the same day, the CSRC announced in a statement that it would encourage more mutual and private funds, brokerage firms, and social security funds to enter the market and promote more share buybacks as ways to attract new capital and maintain market stability. It also declared a zero-tolerance policy toward market disruption activities, including illegal short selling. Last week, it had effectively restricted short selling by banning stock lending for a certain period.

Additionally, major foreign media such as Bloomberg reported last month that the Chinese government is considering establishing a 2 trillion yuan stock market stabilization fund, and before the market closed that day, news emerged that President Xi would receive direct reports on stock market-related matters. On the 5th, the People's Bank of China continued its liquidity supply stance by lowering the reserve requirement ratio (RRR) by 0.5 percentage points.

The Key to Restoring Trust is 'Economic Recovery'... "Sustained Rebound Difficult Without Stimulus"

[Image source=Yonhap News]

The authorities' policies (RRR cut and strengthened market supervision), guidelines (short selling restrictions), and messages (direct reports to President Xi) were interpreted as positive signals by the market, effectively acting as a triple boost to the stock market. Wang Zheng, Chief Investment Officer (CIO) at Jingxi Investment Management in Shanghai, explained, "Policymakers are clearly concerned about the continued stock declines and want stocks to stabilize before the upcoming Spring Festival. These measures will likely be effective in easing selling pressure for now."

However, among experts, the dominant diagnosis is that the more certain driver for stock market support is 'economic recovery.' Analyst Zhang Chi from Haitong Securities told major foreign media, "The key to restoring confidence for sustained stock price increases still lies in economic recovery. Investors need to see rebounds in consumption, exports, employment, and income."

Wang Qi, CIO of the Asset Management Division at UOB Kay Hian Investment Bank, assessed, "The market's trust issues run so deep that more dramatic and direct support, such as authorities leading market purchases, is necessary. Investors are unlikely to buy based on the previous weak measures." He added, "The longer the delay, the higher the cost the government will have to pay."