China’s desperate measures to save Hang Seng, Shanghai index near

The Hang Seng and Shanghai Composite bounced back on Tuesday as the recent sell-off eased. In Hong Kong, the Hang Seng index surged by almost 3% while in Mainland China, the Shanghai Composite and SZSE Composite rose by about 50 basis points each. Despite these rebounds, Chinese indices are among the worst performers globally.

Hang Seng index vs China A50

Desperate measures to save Chinese equities

Last week, I wrote that a panic mode was spreading in China as the country’s stocks continued plunging as their American peers surged to a record high. One of these measures came from Citic Securities, the biggest broker in the country, which decided to suspend short selling of some equities.

Short-selling bans, in theory, should prevent more downside by reducing the number of investors betting against equities. In practice, however, they are not the best approaches to save stocks. For example, the ban did not work out well in 2015 as Chinese stocks plunged. Most recently, the ban has not helped to save South Korean stocks.

Now, Bloomberg is reporting that China wants to invest over $278 billion in equities. These funds will mostly come from offshore accounts of China’s state owned enterprises. This is a major event that could have some short-term benefits for the country’s equities.

In addition to this action, Beijing is also considering other options that could help stabilise the stock market. However, these actions will likely provide a short-term reprieve to Chinese stocks as the economy faces headwinds

China is going through a rough patch

These measures came at a time when China is going through a rough patch. The real estate sector, which accounts for a big part of the economy, has collapsed. Also, the country is going through a deflation, which could hurt consumer spending. In a note, an analyst who covers China told CNBC:

“Deflation is a serious issue. So I am kind of surprised that they kept the prime rates unchanged. You know, it would have been nice if they had lowered them to try to get some stimulus into the country.”

Additionally, China is also going through a banking, debt, and local government crisis. The banking crisis is because most of loans in the industry are backed by real estate, a sector that has collapsed. At the same time, most local governments make most of their money from land sales, which have slowed.

Worse, this local government debt has surged over the years. In October, Beijing ordered banks to roll over local government debt, which is estimated to be $13 trillion. 

Taken together, the collapse of the real estate industry and the stock market has led to weak consumer and investor confidence. Also, foreign investors have dumped their Chinese equities as tensions with Western countries have escalated.