By Wei Hongxu*
On April 21, all three major A-share indices experienced sharp declines due to a combination of local and global causes. The Shanghai Composite Index fell 2.26%, the Shenzhen Component Index fell 2.7%, the ChiNext Index fell 2.17% and the CSI 300 Index fell 1 .84%. More than 4,400 stocks fell in both cities, while industrial categories led by tourism, fertilizers, agriculture and photovoltaics almost everywhere.
In early April, the Shanghai Composite Index fell 7.5%, down 10.5% since early March. The CSI 300 index fell 13.40% from 4,614 in early March to 3,995.83 currently, which is down 21.31% from 5,078 in mid-December last year. Since the additional funds were no longer being injected into the market, only equity funds were up for grabs. Since mid-March, A-share trading has been declining, indicating a lack of investor confidence.
The ANBOUND researchers believe this demonstrates market pessimism about the future economic situation. With increasing downward pressure on the economy, restoring market confidence and stabilizing expectations are key to contributing to the healthy development of the capital market, as well as sustaining growth and averting risk.
Figure 1: The Shenzhen Component Index has fallen over 4,200 in the past 4 months
Market institutions have generally accepted the various factors that have caused the recent severe stock market declines. First, the global geopolitical risk of distorting the supply chain and affecting corporate profits is rather high. Second, since the Federal Reserve intensified monetary tightening, the rapid narrowing of the interest rate differential between China and the United States, as well as the inversion of the RMB exchange rate, lead to a change in the RMB exchange rate, raising concerns about capital flows. . Secondly, the resurgence of the domestic pandemic is having a significant negative influence on the Chinese economy, especially on consumption and real estate as indicated by the first quarter economic statistics, which has increased concerns about the country’s macroeconomy. Finally, the pessimism was accentuated by a substantial gap between the central bank’s recent macroeconomic measures and market policy expectations. Therefore, as long as current internal and external concerns persist, the A-share market is unlikely to improve much anytime soon.
Figure 2: The Shanghai Composite Index has lost more than 600 in the past 4 months
Historically, the fluctuations and transformation of the Chinese stock market could not fully reflect China’s overall economic situation. However, in terms of expectations, the evolution of the A-share market trend, acting as a barometer of the economy, continues to illustrate the real expectations of capital market investors on future activities and the global economic development. As seen in the market trend in March, changes in external variables have been absorbed, but recent equity market volatility is more likely to be compounded by changes in internal elements. As a result, changes in China’s economic situation and political expectations are undoubtedly the cause of the dramatic stock market volatility. Investors are increasingly concerned about the negative economic impact of COVID-19 outbreaks, as well as lack of confidence in the stability of current economic strength and the pace of macroeconomic measures supporting the economy. As things stand, despite the continued implementation of measures and policies aimed at stabilizing the capital market, these policies are insufficient to restore market confidence.
The pandemic and political pronouncements are not only hurting the capital market, but are also major variables influencing China’s economic future. Notably, the recurrence of COVID-19 is concentrated in economically developed regions such as the Yangtze River Delta and the Pearl River Delta. The scope and depth of its economic impact could exceed that of the Wuhan outbreak in 2020. In such a case, we believe there is a demand for dedicated unconventional policies. In this regard, it is necessary to implement targeted measures to stabilize the economic fundamentals based on the strengthening of prevention and control. On the other hand, it is also essential to promote a systematic easing of macroeconomic policies to avoid the catastrophic consequences caused by the contraction of demand.
Since the beginning of the year, as part of the Chinese central bank’s monetary policy implementation process, it has adopted a cautious approach of gradual easing, which is far from political expectations. Although the central bank has maintained “reasonably abundant liquidity” overall, the reality of the national economy indicates that the private economy and a large number of small and medium-sized enterprises are unable to obtain support. to sufficient credit thanks to these “precise liquidity provisions”. . Such an economic structural difference requires not only targeted structural reforms, but also overall easing to achieve the dredge effect from “loose money” to “loose credit”, which would reverse the passive situation. Zhang Jun of Morgan Stanley Securities also pointed out that “refueling tactics” at the political level will result in a waste of political space and could also aggravate the risk of lowering expectations.
Regarding the current external limitations that limit China’s domestic measures, ANBOUND has previously said that variables such as interest rate differentials produced by economic and political disparities are just one of the external factors affecting the Chinese economy, but not the most important. More attention should now be paid to the fundamental factors driving economic growth and structural improvement. In policy terms, it is imperative to strengthen the “autonomy” of macro policies. We should occupy this window, fundamentally reverse the economic trend, and help the capital market to build stable market expectations and political expectations before the international situation undergoes further development, thereby better reacting to changes in external factors.
It would be difficult to reverse the situation once market expectations change. When combined with a self-reinforcing impact, it frequently leads to a vicious downward spiral in the capital market and the real economy. Therefore, it is difficult to reverse market expectations without stable political anticipations. Judging from the first quarter economic data, the overall economy is still resilient and has a stable base. However, to achieve the economic growth target for the current year, it is still necessary to strengthen the implementation of macro policies. This is not only conducive to the stability of the capital market, but also to the economy as a whole.
*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK