1 China’s real economy continues showing weakness amid market rally
China’s stock market surges
Sept. 30
China A-shares climbed, extending the previous rally.
The combined turnover on the Shanghai and Shenzhen stock exchanges surpassed 1 trillion yuan in the first 35 minutes after the market opened, setting a new record for the fastest time to reach 1 trillion yuan in transactions.
The Shanghai Composite Index was up by 8.06 percent, closing at 3,336.50 points. The Shenzhen Component Index increased by 10.67 percent and closed at 10,529.76 points. The total turnover of both markets reached nearly 2.6 trillion yuan, a 79 percent surge compared to the previous trading day and the first time since June 2015 that this level was reached.
The Shanghai and Shenzhen indexes had risen by 21.91 percent and 30.40 percent respectively since Beijing announced economic support policies on Sept. 24.
Concerns raised about overbought markets
Sept. 30
1. Mainland media reported that many search terms related to the stock market surge began trending online, including “A-shares crazy bulls,” “an investor made 520,000 yuan in the morning,” and “a web novelist made 3 million yuan from the stock market and stopped writing.”
The reports also noted that the flood of funds into the A-shares market led to a wave of large-denomination certificate of deposit transfers in banks. Concurrently, there have been delays in the bank-to-securities transfer system, and brokerage trading systems were again overwhelmed.
2. Tian Xuan, the dean of Tsinghua University’s National Institute of Financial Research, told Caijing Magazine, “The [stock market] rise is too fast, and a crazy bull or sudden bull market is not necessarily a good thing.”
A brokerage insider also told Caijing, “The market is now in an irrational buying spree. We hope investors can be more cautious.”
3. Xu Gao, the chief economist at BOC International Securities, told mainland media that market sentiment has been significantly boosted by the unexpectedly loose monetary policy. However, it remains to be seen if this can drive steady growth in the real economy and much depends on the direction of fiscal policy.
Liu Yuhai, director at the China Chief Economist Forum, warned that the A-shares market could suffer a sudden shock at any time. He noted that a tech-focused exchange-traded fund hit the 20 percent upper limit in a single day and said that this was “extremely exaggerated and very rare.” Liu added that the market is significantly overbought.
Listed companies reduce holdings
Multiple listed companies successively made shareholder reduction announcements amid the broad rise in A-shares. Per incomplete statistics, at least 60 listed companies on the Shanghai and Shenzhen stock exchanges issued such announcements between Sept. 24 to Sept. 30, 2024.
Real estate prices continue to fall
Sept. 30
China Real Estate Information Corp. (CRIC) released the following data in its September 2024 list of top 100 China real estate enterprises by sales:
- The top 100 real estate companies in China achieved 251.72 billion yuan (about $35.9 billion) in sales in September, a year-on-year decrease of 37.7 percent. The decline accelerated from a year-on-year drop of 26.8 percent in August.
- The month-on-month sales increase of the top 100 real estate companies in China was up by 0.2 percent.
- The total sales of the top 100 real estate companies in China from January to September 2024 was down 36.6 percent year-on-year to 2.63 trillion yuan.
China factory and service activity slows
Sept. 30
1. The National Bureau of Statistics purchasing managers’ index (PMI) was 49.8 in September, up from 49.1 in August but still below the 50-point mark separating growth from contraction. The reading meant that China’s factory activity shrank for a fifth straight month.
2. The Caixin/S&P Global services purchasing managers’ index was 50.3 in September, down from 51.6 in August and the lowest since September 2023.
Meanwhile, the Caixin/S&P Global Composite PMI dropped to 50.3 in September, down from 51.2 in August.
Our take
1. Beijing’s recent economic support measures appear to be an attempt at leveraging up the capital markets through monetary easing. The recent market rally is therefore a technical and liquidity-driven surge, and is likely to be a short-term phenomenon. The market rally will also likely increase financial risks in China unless the CCP authorities subsequently introduce more concrete measures aimed at addressing the fundamental problems plaguing the Chinese economy.
There is ample pessimism about the market rally despite the optimistic headlines in both official mainland and Western media. Chinese economists and industry insiders generally concur that the recent stock market surge was policy driven and are concerned about irrational overbuying. Also, the fact that many major shareholders of listed companies are reducing their holdings amid the market surge suggests that they are looking to cash out when stocks are relatively high and are not very confident about the market’s prospects.
By the year’s end, should the shareholders of state-owned enterprises also cash out on their stocks, or should Beijing’s subsequent fiscal policies fail to tangibly reverse the economic downturn, or should international developments become highly unfavorable to China, the current stock market rally would unlikely be sustained. If many people believe that the market has peaked, bearish sentiments could trigger a wave of panic-driven selling and market turmoil.
2. The stock market surge creates room for the CCP authorities to manipulate official data, ramp up propaganda efforts to buoy the “bull” market, and benefit SOEs and local state-owned asset authorities.
i) The sharp rise in the stock market will boost the value of renminbi-denominated assets. This affords Beijing “reasonable” justification to claim next year that China had achieved its 2024 economic growth target.
ii) We suspect that certain trending search terms in China connected with the recent stock market surge are likely to be part of the CCP authorities’ propaganda tactics to sustain the market.
In particular, the story about the web novelist who stopped writing after making a killing in stocks appears to be exaggerated and barely believable. According to mainland media reports, the web novelist claimed to have raised 5 million yuan from family members and made more than 3 million yuan in just a few days, achieving a 60 percent profit margin. However, the Shanghai and Shenzhen indexes only rose by 21.91 percent to 30.40 percent during the surge, meaning that the person greatly outperformed the markets. In the unlikely event that the web novelist somehow picked all the “correct” stocks, then the person was either extremely fortunate or had investment skills, foresight, and trading capabilities that potentially exceeded that of even the most skilled professional investor or financial institution. Some Chinese netizens have questioned why the web novelist was in the writing business when the person should have instead been utilizing their talent in the finance sector.
The CCP authorities are likely spreading “get rich quick from stock investing” propaganda to play into people’s greed, and convert such desires into support for the markets. Households have 107 trillion yuan in fixed deposits, and Beijing would be looking to “incentivize” residents into becoming “financial consumers” who would reinvest the money in buying stocks. The total market capitalization of the Shanghai and Shenzhen stock exchanges rose from 67.8 trillion yuan on Sept. 23 to 84.3 trillion yuan on Sept. 30, an increase of 19.6 percent. If households can be “guided” by the CCP authorities into transferring into stocks just 10 percent (about 10.7 trillion yuan) of their money in fixed deposits, the stock market could potentially go up by another 15 to 20 percent. The resulting bullish sentiments could make households in general more inclined to spend more, curtailing deflationary pressures.
iii) The biggest beneficiaries of the recent soaring markets are SOEs, centrally administered SOEs, and local State-owned Assets Supervision and Administration Commission who own large stakes in the aforementioned companies.
By the end of 2023, national SOEs had total assets of 317.1 trillion yuan and a budget revenue of 674.4 billion yuan (YoY increase of 18.4 percent). Should Beijing’s recent economic support measures and the stock market surge lead to an increase in the return on total SOE assets by just 1 percent, that would result in more than 3 trillion yuan in earnings.
Higher returns on state-owned assets would help the localities partially offset declining land sales revenue. Nationwide land sales revenue for January to August 2024 was just 2 trillion yuan, down 25.4 percent from the previous year. Assuming the downward trend holds, total land sales revenue for 2024 is projected at around 4.13 trillion yuan, or lower than the 5.54 trillion yuan in 2023 and 8.7 trillion yuan at the peak in 2021.
3. Falling real estate sales in China, as well as the slowing factory and service activity in September, indicate that China’s real economy is not doing well. A struggling real economy cannot support the recent stock market surge.
Sustained market gains are reliant on long-term economic growth, and more directly growing corporate profitability. However, China’s official PMI has been in contraction for five straight months, and the Caixin PMI, which reflects the situation of coastal export companies, contracted again in September after shrinking in July. As the third quarter is a peak season for exports, the NBS and Caixin PMIs suggest that exports, which are a key driver of China’s economic growth, could be shrinking.
Meanwhile, declining property sales in September indicate that China’s real estate crisis has not been alleviated despite Beijing’s efforts this year. The real estate crisis impacts finance, credit, consumption, local government revenue, and economic growth more broadly in China.
Beijing’s real estate support policies are presently focused on encouraging local governments and SOEs to acquire affordable housing, and less so on addressing the issue of unfinished projects. Nomura chief economist Lu Ting believes that a key problem in the real estate crisis is that many sold homes are unfinished projects, and not so much that homes are unsold. Speaking at an economist forum in Beijing on Sept. 28, Lu noted that while Country Garden has about 36,000 completed but unsold homes, it has sold 730,000 unfinished homes and has another 350,000 unsold homes still under construction. Lu believes that priority should be given to ensuring the completion of pre-sold homes.
Lu also noted that the People’s Bank of China established a 300 billion yuan re-lending loan facility for affordable housing on May 17 and central bank governor Pan Gongsheng announced on Sept. 24 that the PBoC’s contribution to this re-lending program would increase from 60 percent to 100 percent. However, Lu pointed out that only 10 to 20 billion yuan has been lent out so far.
Beijing has indirectly indicated that it does not intend to resolve the issue of unfinished housing projects. On Aug. 2, Bloomberg News reported that the CCP authorities had essentially spurned a proposal by the International Monetary Fund to use central government funds to complete unfinished housing. The IMF urged the PRC in an annual review of China’s economy to deploy “one-off” fiscal resources to finish and deliver pre-sold homes or compensate homebuyers, putting the cost of doing so at about 5.5 percent of the GDP over four years. Bloomberg calculated that this would amount to nearly $1 trillion based on China’s GDP in 2023. The CCP authorities’ official response to the proposal, however, suggested that it had virtually ruled it out.
We believe that China’s real estate sector will not be able to bounce back regardless of Beijing’s reported stimulus proposals and recent efforts by three megacities (Guangzhou, Shenzhen, and Shanghai) to lift all property purchase restrictions. The persistent downturn in the real estate sector would in turn keep up deflationary pressures and contribute to the CCP authorities’ struggles to revive the economy and prop up the stock markets.
