After stimulus, China tries to turn stock market frenzy into recovery

The flurry of official announcements — which included interest rate cuts and support for the beleaguered property and stock markets — could help put the world’s second-largest economy back on track to hit the government’s 5 percent growth target for the year.

Their timing was widely interpreted as a reflection of Beijing’s desire to prevent the slowdown from undercutting the week-long anniversary holiday — a time when people often splash out on everything from travel to new homes.

The difficulty for Chinese policymakers, analysts said, will be turning a rally fueled by opportunism into a recovery in the most troubled sectors of the economy when markets reopen Tuesday.

China’s equity markets are notoriously fickle, in part because they are dominated by casual retail investors, who account for about two-thirds of trading activity. Many of these traders have watched their savings shrink dramatically during the downturn, and they are already growing nervous that the recent uptick won’t last.

Eric Lin, who was recently laid off from a real-estate-consulting job in Beijing, took advantage of the recent rally — which he called a “water buffalo” market — by selling all his Shanghai and Shenzhen shares to pay off his mortgage.

“When I saw the big rise, I sold the next day, fearing that it would fall immediately,” the 36-year-old said. “I don’t have any faith in the Chinese stock market … Whether it is the housing market or the stock market, problems still exist, and I’m still pessimistic about the short- and medium-term outlook.”

On Monday, the last day before trading halted for the holiday, an index tracking the top 300 stocks traded on the Shanghai and Shenzhen markets rose 8.5 percent — the biggest single-day gain since 2008.

Trading demand was so high that the Shanghai Stock Exchange announced plans to upgrade its trading systems, and dozens of security brokerages canceled holidays to handle a sixfold increase in new accounts, Chinese state media reported.

“The recovery in stocks will help shore up confidence and make consumption pop,” said Hong Hao, chief economist of Grow Investment Group, a Shanghai-based hedge fund. Right now, “sentiment is very high,” but whether it sustains depends on how well Beijing manages to execute its stimulus policies in the coming weeks and months, Hong said.

Beyond stocks, China’s economy remains in a tough spot. Official data released Friday showed that manufacturing contracted for a fifth straight month in September. A leading survey of business sentiment found that confidence was at its lowest since March 2020.

Beijing’s urgency was clear in the barrage of announcements last week. An initial interest rate cut by the central bank Tuesday was followed by an unexpected meeting of the Chinese Communist Party’s Politburo, the powerful seven-member decision-making body, where leaders pledged “necessary” government spending to keep growth on track as well as renewed efforts to “stop the property market falling.”

“The problem is that the rally is not driven by a sentiment that the economy is getting better or by investors becoming optimistic about all these companies,” said Gary Ng, a senior economist at Natixis, an investment bank.

The test, according to Ng, will be whether investors hold steady when company valuations hit the levels from before the market downturn that began about two years ago, or choose to sell as soon as they recoup their investments. “I simply don’t think the government will keep doing what we saw last week and keep printing money all the way [to support the rally],” he said.

The huge volumes of trading — around $369 billion in shares bought and sold on Monday — has drawn comparisons to an even bigger rally in 2015, when valuations hit their highest level on record.

Then, similarly frenzied trading, stoked in part by Chinese state media, ended soon afterward with a rout that wiped out a third of the Shanghai market’s value in a month.

A substantial portion of those losses were borne by individual traders who had been slow to react to the sudden downturn.

For a sustained recovery, the government will need to encourage spending from the wealthiest members of China’s middle class, who have been hit especially hard by the slowdown because they were most likely to have invested in property or listed companies.

Analysts are watching for improvements in housing sales, deflation or consumption before ruling on the success of policy support.

So far, evidence of a deeper turnaround is mixed. The number of trips taken over the holiday is expected to reach 1.94 billion, only 0.7 percent above 2023, according to official data. But extreme budgeting remains common among travelers.

On Xiaohongshu, China’s answer to Instagram, users compete in money-saving challenges, such as aiming to spend no more than $70 dollars on food for October.

Analysts are watching to see whether the support package can stabilize a property sector that has been in decline since 2021.

Over the weekend, China’s four largest cities relaxed home-buying restrictions, sparking a wave of interest in luxury apartments. But there has not yet been a similar upturn in sales across smaller Chinese cities hit worst by the slump.

Amid the uncertainty, investment advisers are urging inexperienced individual investors to be cautious not to borrow too much money to enter the stock market.

“The nature of the market is itself a risk for new investors, because the rally is seriously fierce and extremely rare when you look at the whole history of the market,” said Lan Qichang, an author and consultant who runs a club of private investors. “If people blindly increase their positions or even leverage up, it may cause them serious short-term damage if there is a market correction.”

Even more experienced traders focused on long-term returns are getting nervous. “If markets continue to surge after the National Day holiday, then it will get risky,” said an employee at a state-owned enterprise, who, after experiencing multiple market swings in the past, decided to hold 95 percent of his investments despite the surge.

“Everyone wants to pile in to make a bit of money and get out before the fall, but everyone underestimates their greed and ability to make decisions,” he said, speaking on the condition of anonymity to avoid reprisals from his employer. “The market has beat me into being more sober and rational in recent years.”