A Stock Bailout Alone Won’t Fix China’s Woes

Chinese stocks surged recently amidst anticipation of significant state intervention. While this may temporarily stabilize the market, it’s not cause for celebration. Instead, attention should be directed towards addressing deeper structural issues, particularly in the housing market.

The rally in Chinese stocks, with the CSI 300 and CSI 1000 indexes posting substantial gains, was fueled by indications of increased support from Beijing. Central Huijin’s announcement of expanding its ETF holdings and rumors of high-level meetings with market regulators further bolstered investor confidence. Additionally, the resignation of the head of China’s securities regulator added to market speculation.

Recent reports suggest that state-backed funds have injected approximately 70 billion yuan ($10 billion) into Chinese stocks in the past month. However, analysts estimate that a much larger sum, around 200 billion yuan, is required to stabilize the market. While state intervention could provide temporary relief, the underlying issues in the market, such as a slowing economy and ailing real estate sector, remain unaddressed.

Unlike previous market interventions in 2015, when excessive leverage fueled a speculative bubble, the current downturn is rooted in economic fundamentals. Margin loans are significantly lower than previous peaks, indicating less risk of a systemic financial crisis. The focus should now shift towards addressing the challenges in the real estate sector, which is experiencing a slowdown in property investment and sales.

Reviving the housing market is crucial for restoring consumer confidence and stimulating economic growth. This could involve recapitalizing healthy property developers to complete stalled projects and ensure timely delivery of unbuilt apartments. Research suggests that around one trillion yuan may be needed to support such efforts.

Addressing the structural issues in the housing market is essential for sustainable economic recovery. While injecting funds into the stock market may provide short-term relief, it does not address the root causes of the market’s decline. Redirecting resources towards revitalizing the housing sector would have a more significant and lasting impact on China’s economic trajectory.