China’s Economic Revival: What’s Driving the 15% Market Surge?
In Sept 2024, we wrote about the Chinese economic performance and its effect on the MSCI Emerging Markets Index. Here’s a brief summary of what we discussed –
China’s economy has shifted from rapid growth to stagnation, struggling to transition from manufacturing to consumption-led growth. Debt-funded infrastructure and an overheated real estate market led to financial strain, worsened by major developer defaults like Evergrande. The COVID-19 pandemic further disrupted trade and consumer confidence, deepening economic challenges.
These economic challenges are reflected in global market indices like the MSCI Emerging Markets Index, where China’s weight has declined while India’s has risen. In the MSCI Global Index, India’s weight now stands at 2.35%, slightly surpassing China’s at 2.34%.
Read the original write-up here.
Due to these factors the SSE Composite Index, China’s flagship stock index, had dropped by ~11% between Feb 2020 and Sept 2024.
However, it looks like we spoke a little too soon!
Since Oct 24, the SSE Composite Index has surged by ~15%. During the same time, the Nifty 500 is down 11% and the MSCI Emerging Market Index is up 3%.
Here are some of the reasons behind the rally in China :
- Since September 2024, the Chinese government has introduced a series of fiscal and monetary policy measures to stabilize economic growth around 5% for 2024 and 2025 while mitigating the impact of anticipated U.S. trade tariff increases.
- September 2024:
- The central bank rolled out its most aggressive monetary stimulus since COVID-19.
- Key measures: Interest rate cuts (including on existing mortgages), lowering the minimum down payment to 15%, and fresh funding for equity purchases.
- Additional steps: Reduced reserve requirement ratios by 50 basis points and cut the benchmark seven-day reverse repo rate by 20 basis points.
- October 2024:
- The finance ministry pledged increased debt issuance, support for indebted local governments, and subsidies for low-income individuals.
- The housing authority expanded the “white list” of unfinished projects eligible for funding and increased bank lending to 4 trillion yuan by year-end.
- China lowered benchmark lending rates by 25 basis points.
- November 2024:
- China introduced a $1.36 trillion debt package to ease local government financing pressures and sustain growth.
- New tax incentives on home and land transactions were announced to boost demand and support developers in the struggling property sector.
- December 2024:
- China shifted from a “prudent” to an “appropriately loose” monetary policy for the first time in 14 years.
- Top leaders pledged to expand the budget deficit, issue more debt, and loosen monetary policy to sustain growth.
- Budget deficit target: 4% of GDP in 2025 with a 5% economic growth goal.
- Authorities approved $409.19 billion in special treasury bonds, the largest annual issuance on record.
- January 2025:
- Millions of government workers across China received unexpected wage increases.
- This one-time payout injected $12–$20 billion into the economy.
- September 2024:
- The launch of DeepSeek, a cost-effective AI model, has renewed global interest in Chinese tech firms, boosting stocks and attracting hedge fund investments. The Hang Seng Tech Index has surged by ~30% on a year-to-date basis. Optimism over the DeepSeek-led tech rally and expectations of economic stimulus are driving increased investments in Chinese equities. Beijing is also signaling support by engaging top entrepreneurs like Alibaba’s Jack Ma.
Conclusion:
After a prolonged period of economic stagnation and market decline, China’s equity markets have made a surprising comeback, fueled by aggressive fiscal and monetary interventions. A combination of government stimulus, debt restructuring, monetary easing, and a renewed tech boom driven by AI advancements has propelled the recent surge in Chinese stock markets. While uncertainties remain—particularly around global trade tensions and long-term structural challenges—investor sentiment has clearly improved. Whether this rally is the start of a sustained recovery or a short-term reaction to policy support remains to be seen.
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