A couple of years ago, many compared China to the eternal phoenix rising from the ashes: only in this case from the Covid-19 pandemic.
Unfortunately, the miracle did not happen, and instead of a rapid recovery of business activity and consumer demand, stagnation set in.
Moreover, Beijing found itself with a deflation problem that will not be easy to solve. In this regard, many have begun to draw parallels with Japan and predict a similar fate.
What are the chances of that happening?
To a large extent, the answer depends on government action. For example, an increase in stimulus would give a boost to the country’s economy.
On the other hand, problems such as the housing-market crisis and shadow banking, as well as high youth unemployment, need to be addressed.
And finally, it would not hurt to reduce regulatory pressure on certain industries. A laissez-faire approach, so to speak.
The good news is that progress is being made on all fronts.
For example, the online-gambling rules that collapsed that market were withdrawn and the official who proposed the idea was reportedly fired. It is not enough, but it is a step forward.
More important, there is unofficial talk of creating a US$280 billion fund to support the stock market. Finally, the Chinese central bank has launched stimulus.
One trillion yuan will be released from bank reserves to support the economy. In addition, refinancing rates for small businesses and agricultural enterprises have been lowered.
At first, the stock market, in particular the Hang Seng index, was upbeat, but with the possibility of new hurdles, including geopolitical ones, the correction followed.
What is keeping investors on edge?
The first risk is the trade war with Europe. Not only is the rhetoric intensifying, but mutual investigations are being launched.
As we have seen in the US confrontation with China, this does not lead to anything good.
The second threat is the possible victory in the US presidential election of a candidate with a strong stance against China, someone who threatens not only trade restrictions, but also new sanctions.
What’s the bottom line?
Despite recent rallies in Chinese equities, the market fundamentals for long-term growth remain unclear. The question now is whether the risk justifies the means.
On the one hand, Chinese equities have become very cheap thanks to the long period of correction. On the other, there are many risks that could flare up and further affect the economy.
In terms of what to do next, it is recommended to make decisions after conducting your own research with the support of tools such as this volume indicator.