China’s leadership apparently lacks certainty in their economic and financial aptitude. After years of failing to reverse the negative consequences of China’s property market, these leaders, according to news reports, seem prepared by instructing state-owned firms that hold funds overseas to order them home and use them to procure Chinese stocks. It is rumored that the said effort would cost approximately 2 trillion yuan ($280 billion). However, it was an extraordinary move, even in the communist government. In fact, Beijing’s ‘shot across its bow’ will not be resolved unless we start addressing the underlying issues affecting China’s economy sooner rather than later!
The case of China’s stock market has long suffered. The Wall Street Journal’s accounting for the country’s Shanghai Stock Index has been more than 21% over three years. Valuations have dropped accordingly. Price-earnings ratios, a good standard of investor confidence in future dividends, remain on an average at 10.4 times current earnings compared to the last ten years’ background level, which was equal to about 12.5.” However, rumors of the government’s extensive spending program did inspire some speculative buying and helped push the index up nearly 5 percent in three quick days; stocks nevertheless returned downwards again, whereby they have now been highly depressed from their very own high points for 2021.
However, other indicators of depressed valuation – such as price-to-earnings multiples that well and truly reflect the real problems facing the economy. The rate of growth has sharply decelerated from historical levels, and earnings, the fundamental pillar that props up stock valuations itself, appears significantly ensnarled. It is, of course, the population’s ongoing property crisis in China that constitutes a significant part of this ugly image. It started three years ago with the Beijing government’s rapid, abrupt takeaway of active support for residential buildings.
This action has triggered a lack of significant development companies, and also Beijing could not compensate for the financial consequences of such failures, so consequently, Chinese finance cannot provide the flows of credit required to sustain growth. Adding further difficulty to the situation, however, is the human factor – property failures, along with their consequent financial restrictions, have led to a hefty slowdown in house purchasing and, thus, a fall in real estate rates.
That was only the beginning of China’s troubles. This is an effect so dramatic on personal income that Chinese consumers have withdrawn their spending. At the same time, exports from China have declined, with foreign customers aiming to reduce dependence on one source in their supply chains and governments outside of China becoming significantly more hostile to Chinese trade—most obviously the Washington-Brussels axis and Tokyo. What’s worse is that Beijing’s security obsession has deteriorated its way into firms’ operations such that the flow of foreign investment to China is in slow motion. Also, the close connection with centralized control in Beijing has stunted investment development among domestic private businesses.
As a result of this, it becomes unsurprising that Chinese stocks have been hit. The problem is that Beijing has still not even approached addressing these issues, and this, in turn, explains why stocks no longer carry the hopeful valuation they enjoyed years ago when China’s economy was growing at a near double-digit rate, providing all the reasons that were necessary for a cheer. The underlying economic and financial problems that include the factors above are also guaranteed to prove how Beijing’s stock purchase would have no impact in the future. If the rumors are true, it is big enough to cause a scene. The proposed amount represents approximately 8% of the total unpaid value for every Chinese stock on the market.
However, unless Beijing comes up with a convincing program to address the more pressing issues in question, that is also much needed as regards such an enterprise ahead of stocks falling flat once again upon completion of this purchase program. As was the case exactly one year ago, when using a similarly poorly thought-out strategy, Beijing dropped prices even for several weeks before finishing its buying campaign.
The future seems rather bleak for the wannabe investors who are eyeing to invest in Chinese stocks. This official buying is likely to induce an initial upside in the stock prices, which will lure many investors to enter into trading with hopes of profiting from going further. However, in the lack of fundamental treatments, ending prices will most likely happen fast and spoil both official sale staffing and work for people who joined up to have fun.
