China’s Slumping Stocks Need Help From Beijing. Don’t Count On It.

However, economists and analysts see little sign Beijing is willing to take the more aggressive steps needed to stabilize the property market—which accounts for a quarter of economic activity—and restore economic confidence more broadly after a period of erratic policy measures.

Confidence in the economic recovery among households, businesses, and investors has been deteriorating, as reflected in China’s stock market. The
iShares MSCI China
exchange-traded fund (ticker: MCHI) is down 2% so far this year, after sliding 11% in 2023. The
S&P 500
soared 24% last year, in comparison.

Bargain-hunters who were hoping Beijing had learned from past missteps—such as its harsh Covid-19 restrictions and crackdowns on the internet sector—were disappointed in late December when a regulatory agency proposed restrictions on online gaming. The draft regulation sent Chinese stocks careening and blew apart the notion that the government crackdown on the internet sector was near an end.

The draft reinforced the continued risk of arbitrary policy measures and increased intervention in the private sector that have hampered a recovery.

“This latest regulatory misstep undermined the signals that other parts of the government had been trying to send, showing that the supposed pivot toward economic growth and away from ideology and social control remains at best incomplete,” writes Gavekal Research’s Andrew Batson in a note to clients. Instead, Batson notes Chinese President Xi Jinping “has given extremely clear and consistent instructions over many years that economic growth needs to be downgraded in importance relative to other political priorities.”

Indeed, the Chinese leader prepped the country for more challenges ahead in his year-end speech, noting: “On the path ahead, winds and rains are the norm.”

While Beijing is likely to keep rolling out policies aimed at stabilizing growth, investors seem to be losing hope for large-scale stimulus that could build more momentum in the economy and for the dramatic policy action needed to stabilize the flagging property market.

Along those lines, J.P. Morgan’s Asia-Pacific research team in a note to clients warns the property market is unlikely to bottom this year. The property malaise means greater attention on China’s mounting debt burden—at the household level, local governments, and midsize financial institutions.

In turn, J.P. Morgan expects regional banks to face increasing pressure. That could create another channel for trouble as regional banks dominate the banking system, accounting for more than a quarter of total bank assets, or 87% of gross domestic product, according to J.P. Morgan.

How to tackle China’s broader debt issues will likely dominate policy discussions this year. So far, however, there is little consensus between economists and others within the government: One side of the debate calls for restraint on stimulus and investments to improve the quality of economic growth, while the other wants to maintain 4% to 5% economic growth despite the costs.

China’s debt problem is no secret. But Michael Pettis, a finance professor at Peking University’s Guanghua School of Management says fewer people realize the debt is a byproduct of the heavy investment of past decades, which led to overbuilding of property, infrastructure, and manufacturing that produced little return.

The distinction matters, Pettis writes in a note for Global Source Partners, because the problems don’t emerge from the liability side of China’s balance sheets but the asset side. China now is facing a situation where it has to recognize that the real value of its assets on balance sheets from bridges, roads and other projects are less than what was recorded—and not enough to service the debt.

“Postponing this recognition and focusing mainly on minimizing financial disruption, as Japan did in the 1990s, will just increase the overall cost to the economy,” Pettis writes.

None of these factors are likely to entice consumers to spend more. Surveys show consumer confidence is still weak, with J.P. Morgan noting weak confidence could be a result of job security concerns and pay-cut pressure for employees in sectors that were targeted by crackdowns last year, as well as government employees facing similar concerns.

The outlook for China’s economy—and stocks—is heavily dependent on policy. The problem is that the policy path is becoming harder to predict and deliberations are becoming more opaque, Gavekal Research’s Batson writes. The optimistic take? A new generation of officials are in position at economic agencies as Xi’s third term gets under way, and they likely want to deliver some positive news in their first year on the jobs. That could mean some out-of-the-box options to boost growth could gain traction—if they follow through with substance, Batson says.

Given the uncertainty, investors are likely to wait to make sure any pivots are sustainable.

Write to Reshma Kapadia at [email protected]