Why did China’s stock market struggle in the last two years

After the Lunar New Year holiday, CSRC under the leadership of Wu Qing, held a series of seminars with market participants who proposed tighter scrutiny of company listings and trading behaviour to revive market confidence. Shortly after, CSRC barred major quant fund Lingjun Investment from buying and selling for three days after stock exchanges said it broke rules on orderly trading and said it would mete out increasingly tough penalties on fraudulent listings, accounting scams and misappropriation of funds by big shareholders.

What is ailing China’s stock market?

Zero-COVID

China’s tough three-year zero-COVID policies hurt business confidence, and hindered domestic demand, production and investment. Despite an initial bounce in activities after Beijing lifted lockdowns in early 2023, the economic recovery remains bumpy and uneven. Consumers are not spending, prices are falling and the deflation risk is affecting company earnings. More and more companies are turning to overseas markets for growth.

Real estate

China’s real estate sector, which contributes about a quarter of GDP, has been in a prolonged downturn. New home prices saw their worst declines in nine years in 2023. A number of top property developers have defaulted on their debts in the past few years and have been struggling to deliver unfinished projects. Property giant China Evergrande Group’s liquidation dealt a fresh blow to market confidence.

Sino-U.S. tensions

The competition between the U.S. and China has spread from technology to trade and finance. The Biden administration has restricted certain U.S. investments in China. Large pension and endowment funds in the U.S. and its allies have also cut China exposure to avoid political risks.

Regulatory crackdown

China’s crackdown on the tech sector wiped out over $1 trillion of value from its big tech companies since November 2020, which analysts pinpoint as the start of the regulatory crackdown with the shelving of Alibaba affiliate Ant Group’s initial public offering. Foreign direct investment fell to a 30-year low in 2023 as companies moved manufacturing to countries such as India, Mexico and Vietnam in the wake of mounting geopolitical pressures, data privacy rules and regulatory crackdowns.

What is wrong with the economy?

Since 2022, when President Xi Jinping consolidated his power, Beijing has often stated its objectives are to achieve high-quality development, and to balance that with security.

Key among those priorities are reforms of the indebted state sector and local governments, channelling of resources towards the goals of technological self-sufficiency, measures to boost domestic investment and consumption in electric vehicles, artificial intelligence green energy projects, and fighting monopolies and corruption.

Private firms, which account for 60% of gross domestic product and 80% of urban jobs in the world’s second-largest economy, are suffering not just from three years of COVID curbs but also regulatory crackdowns that have targeted sectors from technology to finance and private tutoring.

Many provinces are drowning in debt, as a key source of income – land sales- have collapsed. The total debt of China’s local government financial vehicles, or LGFVs, is estimated to be above $9 trillion in 2023, equivalent to half of the country’s economy. The sustained downturn in the property sector has been a key drag on the country’s broader recovery. With wages and home prices dropping, consumer confidence is struggling. Those who can are moving cash abroad. GDP growth has slowed to 5% from heady levels of 7% to 8% a few years ago.

What have policymakers said and done to fix the economy?

Wary of its past cycles of heavy investment-led growth and of a build-up of debt, Beijing has been reluctant to launch forceful stimulus measures to boost market sentiment and revive demand.

China approved an additional 1 trillion yuan of sovereign bond issuance and a widened budget deficit in October 2023 to support the economy. And Beijing has delivered deep cuts to bank reserves and benchmark mortgage rates to get banks to lend more and to revive home buying.

Beijing has outlined plans for more affordable housing and urban village renovation and infrastructure. It has begun easing home purchase limits and down payment requirements in some cities, and banks have been asked to extend lending to property developers.

It has issued refinancing bonds to help ease debt burdens of local governments, while also restricting the borrowing ability of some local government financing vehicles (LGFVs).