Emerging market investors, who previously gained from the ‘Buy India, Sell China’ strategy, are rethinking their approach as Beijing rolled out significant stimulus measures to boost its economy. Meanwhile, India’s Nifty and Sensex have faced selling pressure, with foreign institutional investors (FIIs) withdrawing funds.
Lu Ting, chief China economist at Nomura, a Japanese investment bank on Thursday told the South China Morning Post that, “Given the current market momentum and our tracking of sentiment on China’s social media, the risk of repeating the epic boom and bust in 2015 could rise rapidly in coming weeks.”
“While investors might still be OK to indulge in the boom for now … we wish Beijing could be more sober,” he told the Chinese daily.
Lu also emphasised that, although stock market valuations and leverage levels have not yet reached critical levels, China’s economy remains in a fragile state due to the ongoing property market slump. He added, “Beijing will likely introduce more fiscal measures and supportive policies, but the final size and specifics of the package may be uncertain and improvised, given the potential stock bubble and the unresolved debates on policy direction.”
In a worst-case scenario, a stock market frenzy could lead to a crash similar to 2015, prompting Beijing to print money to contain the decline, he added. However, such measures could result in excessive stock accumulation, reduced liquidity, and capital flight, leading to yuan depreciation and limiting the central bank’s ability to intervene further.On the positive side, Chinese officials could monitor emerging market bubbles closely and take timely action to stabilize the markets while tackling broader challenges, such as reforming the property sector and restructuring the fiscal system, Lu noted.
China’s Big Bang Stimulus Package
China has rolled out its most significant stimulus package since the pandemic, aiming to steer its economy out of deflation and back toward its growth targets.
China’s central bank introduced a series of economic stimulus actions, including reducing banks’ reserve requirement ratio and policy interest rates, cutting mortgage rates for existing homes, and launching policy tools backed by 800 billion yuan (US$113.7 billion) to support stock markets.
These moves temporarily boosted onshore and offshore markets, although the Hong Kong market dipped on Thursday.
The broad package included increased funding and interest rate cuts as the recent disappointing data fueled fears of a prolonged economic slowdown.
China’s attempt to arrest property crisis
The measures to support the property market included a 50 basis point reduction in average interest rates for existing mortgages and a reduction of the minimum down payment requirement to 15% for all home types.
China’s property market has been in a severe slump since its peak in 2021, with several developers defaulting and leaving behind large inventories of unsold apartments and incomplete projects.
In response, Beijing removed many restrictions on home purchases and significantly lowered mortgage rates and down payment requirements. However, these efforts have not yet succeeded in reviving demand or stopping the sharp decline in home prices, which dropped at their fastest rate in over nine years in August.
According to a Reuters report, the ongoing property crisis heavily impacted the broader economy and eroded consumer confidence, with 70% of household savings tied up in real estate.