The remarkable rally in China’s stock markets began to show signs of fatigue on Tuesday, as Hong Kong shares took a steep tumble and mainland markets cooled off from their earlier peaks. Investors were left disappointed by the lack of specific details from officials on further measures to support China’s slowing economy, causing optimism to wane.
While mainland markets initially roared back to life following a week-long holiday break, turnover surged past a trillion yuan in the first 20 minutes of trade, and indices hit two-year highs. However, the benchmarks soon pulled back, and proxies for Chinese growth across Asia started to slip as the stimulus-fueled buying frenzy appeared to lose steam.
In afternoon trade, the Shanghai Composite Index was still up by 3.1%, and the blue-chip CSI300 rose by 4%. Both indices had earlier surged to dramatic highs, with the CSI300 briefly climbing as much as 10.8% and the Shanghai Composite up 10.1%, reaching levels not seen since 2021. These gains, however, were short-lived as traders shifted from the initial euphoria towards a more cautious stance.
The rally had been driven by optimism around the recent stimulus measures, which included significant interventions by China’s central bank and government to support the economy. Yet, as the day wore on, it became clear that investors were seeking more clarity on additional fiscal support, something that China’s policymakers failed to provide.
While mainland markets were still showing gains, Hong Kong’s Hang Seng Index fell sharply, sliding by 7.7%, as the recent run-up in prices lost momentum. The Hang Seng had been the top-performing major market this year, buoyed by blistering gains in recent sessions. However, the lack of new, concrete economic policies led to a wave of selling, especially in sectors heavily reliant on economic recovery, such as property.
“Markets were hoping to obtain some guidance on the size of fiscal stimulus,” said Rong Ren, portfolio manager at Eastspring Investments in Singapore, “but found little new in Zheng Shanjie’s remarks.” Zheng, China’s top economic planner, assured markets that the government was “fully confident” in achieving economic targets, but he failed to offer any substantial details on future stimulus.
The ripple effects of China’s cooling market activity were felt globally. The Australian dollar, often viewed as a proxy for Chinese economic strength due to Australia’s heavy reliance on exports to China, fell by 0.4%. Similarly, the yuan headed for its sharpest drop in a year, reflecting renewed investor anxiety over China’s economic outlook.
Commodity markets, which are highly sensitive to China’s demand, also wobbled. Iron ore and other industrial metals, which had seen gains earlier in the day, began to pull back as the outlook for China’s growth appeared less certain. European futures were down by 0.8%, signaling a cautious open for European markets later in the day.
Despite the broader market’s fading enthusiasm, certain sectors continued to outperform as investors expected these areas to benefit from government support. Tech hardware makers, brokers, healthcare companies, and builders were among the biggest gainers. The CSI semiconductor sub-index surged by 16.4%, while a sub-index of brokers climbed by 10.6%. Thematic indices focusing on biotechnology, defense, and electric vehicles all rose by more than 10%, underscoring investor confidence in these industries.
“Investors are betting that these sectors will receive a significant boost from the government’s long-term growth plans,” noted Edward Tse, an independent market analyst in Hong Kong. “The government wants to build up its tech sector, particularly semiconductors, so it’s not surprising to see strong gains here.”
In contrast to the gains seen in tech and other growth sectors, property developers, particularly those in Hong Kong, experienced a steep sell-off. Mainland developers listed in Hong Kong fell by 11%, marking one of the largest percentage declines in years. However, analysts believe this was largely driven by technical factors and profit-taking after the sector had seen sharp gains in previous sessions.
“There may be a bit of profit taking,” said Gary Ng of Natixis, adding that the overall sentiment was not significantly different between the two markets. “It’s really about one market being closed for many days, and the other one has been trading.”
The Chinese yuan fell sharply to 7.0502 per dollar, raising concerns about further depreciation amid slowing economic growth. Five-year bond futures also dropped to their lowest levels since July before rebounding after Zheng Shanjie’s news conference.
The yuan’s decline came despite a range of measures introduced by Chinese authorities to stabilize the currency and ensure market liquidity. Before the week-long Golden Week break, the Chinese government had introduced the most aggressive stimulus measures since the COVID-19 pandemic. These included cheap loans for share buybacks and a swap program allowing institutional investors to access cash to buy shares. These measures helped fuel a 25% surge in the CSI300 over just five trading days before the break.
Despite these aggressive efforts to bolster confidence and drive market activity, signs of caution and anxiety are creeping back into the market. Regulators have urged financial institutions to strengthen their controls over leverage and prevent bank loans from illegally entering the stock market. A newspaper affiliated with China’s central bank issued a warning on Tuesday, calling for vigilance against excessive market speculation.
At least one major fund manager has reportedly started restricting new subscriptions to its funds in a bid to guard against the possibility of massive inflows destabilizing the market. This marks a sharp contrast to the exuberance seen in previous weeks when investors seemed confident that Beijing’s intervention would be sufficient to turn around China’s faltering economy.
With Tuesday’s rally losing momentum, all eyes are now on the upcoming National People’s Congress meeting later this month, where investors hope to hear more concrete plans for fiscal stimulus. UBS analysts, in a note to clients, said that this would be the next key event for markets, offering a potential window for the government to announce more detailed plans on economic support.
“There is a good chance that we will see more fiscal expansion in the coming weeks,” said Jun Wei, a senior economist at HSBC. “But the government is being cautious, and they don’t want to over-commit before they have a clear sense of how the current measures are playing out.”
Investors are also keeping an eye on the Ministry of Finance, which is expected to provide updates on its budgetary plans and the allocation of the 200 billion yuan ($27 billion) that has been pulled forward from next year’s budget to fund infrastructure projects and local government spending.
