Chinese stocks experienced their most significant drop in nearly three decades this week as investor hopes for a more aggressive economic stimulus from Beijing were dashed. The Shenzhen composite index fell by 8.2%, its largest one-day decline since May 1997, while the Shanghai Stock Exchange and the CSI 300 index recorded losses of 6.6% and 7.1% respectively. The dramatic downturn came after China's National Development and Reform Commission (NDRC) failed to announce any substantial new policies to boost the economy during a closely-watched press conference.
The sharp sell-off reflects growing concerns over China's economic recovery, which has been sluggish since the pandemic, with persistent issues in the property market and rising youth unemployment. Investors were left disappointed after the NDRC reiterated previously announced measures without introducing new initiatives, causing a rapid reversal of the market gains made following the September stimulus announcement.
"The main concern was that the raft of measures announced prior to last week's holiday, which had lit the fire under a moribund market, were not followed up with any specific actions from the authorities," said Richard Hunter, head of markets at Interactive Investor. The absence of fresh fiscal policies sent shockwaves through global markets, with the Hang Seng index in Hong Kong also dropping 1.4%.
Investor optimism had initially been fueled by expectations of a significant stimulus package aimed at stabilizing the world's second-largest economy. Alvin Tan, head of Asia FX strategy at RBC Capital Markets, noted that investors were anticipating new measures worth between 2 trillion and 3 trillion yuan ($280 billion to $420 billion). "Positive sentiment will turn quickly if we don't get some package at least matching that range," Tan warned.
The State Council Information Office announced that it would hold a news conference later this week, featuring Finance Minister Lan Fo'an, to discuss potential fiscal measures aimed at promoting high-quality economic development. Analysts and investors will be closely monitoring the event for signs of additional government action to support China's struggling economy.
Globally, the market turbulence extended beyond China. Commodities, often seen as a barometer of economic health, also took a hit. Dalian iron ore and Shanghai copper prices fell, and Brent crude futures declined by 4.6% overnight, dropping to $76.90 per barrel. The MSCI World Equity Index, which tracks shares in 47 countries, remained flat, with Wall Street futures slightly down as investors awaited the release of the U.S. Federal Reserve's meeting minutes.
China's economic slowdown is exacerbated by its ongoing trade disputes with major partners, including the European Union. Tensions rose recently as China imposed tariffs on European brandy imports and hinted at duties on petrol cars in response to the EU's decision to tax Chinese electric vehicles. These geopolitical frictions add another layer of uncertainty to an already fragile economic landscape.
Adding to the challenges, the unemployment rate for urban youth in China reached 18.8% in August, highlighting deep-rooted structural issues in the labor market. The broader urban unemployment rate stood at 5.3%. The government is under increasing pressure to meet its modest growth target of 5% for the year, a goal that appears increasingly difficult to achieve.
Nick Ferres, chief investment officer at Vantage Point Asset Management, emphasized the importance of more robust stimulus measures to lift China's GDP. "Support needs to top previous commitments and boost GDP by about 2 percentage points to be helpful," Ferres said, underscoring the need for decisive action from Beijing.
The market rout has led analysts like Eugene Hsiao of Macquarie Capital to call for clearer guidance from Chinese policymakers. "We think markets can still re-rate up from here, but policymakers will need to start showing their cards, or investors will lose patience over how the broader domestic economy, especially consumption, can recover," Hsiao noted.
Despite the turmoil, some market participants remain cautiously optimistic about China's longer-term prospects. Alexandre Marquis, a senior portfolio manager at Unigestion, pointed out that domestic stocks have shown resilience, indicating that foreign investors still see value in China's economic fundamentals, even amid the current challenges.
