T(h)rust

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T(h)rust, or rather how much thrust is needed to rebuild trust in the Chinese stockmarket must have been a question Chinese policy makers were asking themselves this week, a navigation course between trust, policy, and economic challenges. The recent tumultuous week for Chinese stocks has accentuated the formidable challenge facing Beijing in revitalizing a market that has endured a lost decade of equity returns. The MSCI China Index, having witnessed a 17% decline since 2013, raises critical questions about the cost of regaining investor trust. This involves a complex web of geopolitical tensions, regulatory uncertainties, and economic issues that contribute to the prevailing sense of caution, that made China for many investors uninvestable. The MSCI China Index's dismal performance, in stark contrast to equity gains in the US and India, underscores investor skepticism. Sudden geopolitical flare-ups, unpredictable regulatory clampdowns, and an expanding state influence over private enterprises have significantly impacted investor confidence, leading to a drastic three-year decline.

Whilst this week’s positive policy news in the form of lowering bank reserves has spurred a more than 5% rise in the MSCI China gauge, concerns linger about the sustainability of the rally. Analysts suggest that the Chinese government's efforts to enhance the capital market and stimulate growth may indicate a desire for improvement. However, the puzzle lies in the market's underperformance despite China's solid economic growth, prompting calls for stimulus measures, fiscal support, and looser monetary conditions to revive earnings and consumer spending. ?The challenges increased around the Covid-19 lockdown with increased ?tensions between the US and China. Direct mingling in “public companies” with entrepreneurship suppression, and an uncertain policy roadmap only increased the distrust. The recent financial regulatory official's call for strong support to the real estate sector, amidst a crackdown on the industry's debt, reflects the intricate relationship between real estate troubles and local government finances. The cautious relaxation of funding guidelines signals targeted measures, mostly out of dire need.

As China contemplates a potential 2 trillion yuan stimulus package using state-owned companies' funds, uncertainty prevails. Recent measures to stabilize the stock market may provide a temporary respite, but a fundamental economic turnaround is deemed necessary for sustained international investor confidence. Both fiscal support and broader fiscal reforms may be pivotal for China's economic normalization. China's stock market faces a multifaceted challenge, entailing not only the restoration of investor trust but also the resolution of economic issues and policy uncertainties. ?President Xi Jinping’s drive for “common prosperity” is an asymmetry to investors’expectation and is raising uncertainty about business prospects, keeping china in the confidence trap. The government's cautious approach to stimulus, coupled with efforts to boost market stability, reflects the delicate balance required to navigate the complexities and steer the market towards a more resilient future. Conclusion: all the supporting measures announced so far are too defensive to revert the deterioration trend. As China prepares for its annual parliamentary meeting in March, the spotlight remains on the potential unveiling of comprehensive fiscal measures and policies for the year ahead. Until then it looks as if the mentality of international investors remains: With all Chinese, but not with these…

The large performance gap between the United States and China became particularly evident as of February 2021, coinciding with the stringent and prolonged Covid-19 measures implemented in China. This period also marked a global awakening to the extent of reliance on China, often referred to as the "World's factory." Initiatives to repatriate production and the imposition of tariffs initiated what is now recognized as an ongoing economic Cold War, a dynamic that persists to the present day.

Although China has grown mightily in percentage terms, in absolute terms its gap in living standards relative to the U.S. is actually larger than it was in 1990. When the U.S., the UK, Japan and Germany hit their relative peaks, they weren’t just among the largest economies on the planet, but also the richest; China is very large, but it is not rich.