China’s Stock Market Surge: Déjà Vu Or A New Era For Stock Market Rescue?

6-10 minute read

Author: Tucker Massad

Published October 2, 2024

China's latest $114 billion intervention package is being hailed as a game-changer, but is it really new? If you’ve followed China’s economic maneuvers over the past decade, this playbook feels familiar. In fact, Beijing has often turned to large-scale stimulus measures to paper over structural cracks in its economy. A particularly notable comparison is the 2015 stock market crash, when a similar intervention was rolled out in a bid to stem the tide of falling equities.

#The Stimulus Playbook: Echoes of the Past

Back in 2015, the government injected capital into the market, suspending trading for some stocks and encouraging state-owned institutions to buy shares. The result? A temporary reprieve, but ultimately, the market corrected, and investors were left to clean up the mess. The current package looks just as aggressive, with the 500 billion yuan liquidity swap program and 300 billion yuan in shareholder buyback funding. The question is whether this stimulus will have a more lasting impact than its predecessors, or if it’s another short-term fix

During the 2015 intervention, the Shanghai Composite Index initially surged 15%, only to fall 30% a few months later. Today, the CSI 300 has rallied 7% since the latest stimulus was announced, but the long-term sustainability of these gains is far from certain. Looking at the broader economic context, the parallels to 2015 are hard to ignore—investors should be cautious of a similar market correction after the initial optimism fades.

#Real Estate: A Fragile Foundation

One key aspect of China’s current intervention is the effort to stabilize its faltering real estate sector. The property market, which contributes nearly 30% to China’s GDP, has been a drag on the economy as developers like Evergrande struggle under mountains of debt. This isn't the first time China has propped up real estate to avoid broader economic fallout, but this time the stakes feel higher.

Beijing’s decision to allow homebuyers to refinance mortgages is an attempt to shore up demand and prevent a total collapse. Historically, China's reliance on real estate as an economic engine has worked—until now. In previous crises, the government’s quick action prevented contagion from spreading to other parts of the economy. But today, household debt is higher than ever, and the global economic slowdown poses additional risks.

China’s household debt-to-GDP ratio has skyrocketed from 18% in 2008 to nearly 62% in 2024, while real estate prices in major cities have fallen 3-5% year-over-year. By allowing homeowners to refinance, China is attempting to ease some of the pressure, but it’s unclear whether this will be enough to reignite demand in an over-leveraged market.

#Liquidity, Leverage, and the Stock Market: A Delicate Balance

Let’s talk about the elephant in the room: the massive amount of leverage in China’s financial system. Much like the interventions of 2015, the current stock market boost is heavily reliant on liquidity injections, particularly through the central bank's 500 billion yuan swap program. While this sounds impressive, it's really just the latest chapter in China's long history of using debt-fueled growth to prop up markets.

The danger here is that liquidity-driven rallies are often short-lived. Investors pile into stocks, buoyed by cheap money, but when the tap is turned off, the market inevitably adjusts. History tells us that this kind of growth is unsustainable. China's corporate debt levels are among the highest in the world, with a debt-to-GDP ratio of over 160%. This makes the stock market incredibly sensitive to any shifts in liquidity conditions.

As of September 2024, China’s stock market is experiencing a 7% rally following the stimulus announcements. However, corporate debt levels remain at historic highs, and any tightening of liquidity could lead to a sharp correction. For context, in 2015, corporate debt stood at 140% of GDP, but even then, the stock market couldn't maintain its gains.

#Is This the Last Stand for China’s Stimulus Strategy?

While the short-term gains are clear, China’s current stimulus efforts may be the most aggressive—and risky—yet. The People’s Bank of China has been pushing liquidity into the system at an unprecedented rate, but the long-term risks are stacking up. China's economy is no longer growing at the breakneck pace it did in the early 2000s, and the country is facing structural issues that are harder to gloss over with market interventions.

A shrinking labor force, aging population, and declining productivity all suggest that China’s growth model is in need of a serious overhaul. Throwing money at the stock market is a tactic that has worked in the past, but it’s increasingly looking like a band-aid solution to a much deeper problem.

China's GDP growth has slowed to just 3.5% annually, compared to over 10% during its economic boom years. Meanwhile, the People’s Bank of China has expanded its balance sheet by over 30% in the last five years, reflecting its reliance on debt and liquidity to keep the economy afloat. If history is any guide, this kind of growth is unsustainable in the long term.

#Short-Term Gains, Long-Term Worries

China’s latest stock market intervention is a high-stakes gamble. In the short term, the government has successfully boosted investor confidence and sparked a rally, but the structural problems in the economy remain. Just as we saw in 2015, liquidity-driven stock market rallies often fizzle out when the flow of easy money dries up. This time, the risks are even higher, given the country’s ballooning debt and slowing economic growth.

While the markets may be enjoying the current sugar rush, the real question is how long this boost will last—and at what cost to China’s future economic health. Investors need to stay cautious, as the parallels to past interventions suggest that history could very well repeat itself.