Hong Kong Stocks Plummet As China's Stimulus Efforts Fall Short

China's Market Update: The Good and The Bad

For those bullish on China, there is a mix of good and bad news this morning. On the positive side, mainland China's indexes, such as the Shanghai Shenzhen CSI 300, have seen a slight increase. This is due to the fact that mainland China's stock market (A-shares) was closed for the past week and upon reopening, the index rose almost 11% to align with the rally in offshore markets and ETFs. However, the index has almost entirely erased these gains since closing on September 30.

Hong Kong's Market Performance

The real action, however, is in Hong Kong. While China's market was closed, Hong Kong's market soared by as much as 30% following the launch of China's stimulus efforts on September 23. But this is where the bad news comes in. The Hang Seng China Enterprises Index in Hong Kong has not only dropped by as much as 11% after the market opened, but it has also managed to erase nearly half of the gains made since the stimulus launch in less than two hours.

The Reason Behind the Market Crash

So, what triggered this sudden sell-off? Yesterday, China announced another "emergency" stimulus meeting, this time conducted by the National Development and Reform Commission, China's central planning bureau. There were high expectations that China would introduce more stimulus measures, similar to the emergency meeting held on September 26 led by President Xi. However, the press conference, led by Zheng Shanjie, chairman of China’s top economic planner, did not meet these expectations. Shanjie stated that while there are increasing external risks and economic pressures, they remain confident in achieving the full-year GDP growth target. He further stated that new policy measures will focus on expanding domestic demand and increasing support for the property and capital markets. In essence, there were no new measures announced, and certainly nothing close to the Rmb 10 trillion in fiscal stimulus that many were expecting.

Implications of the Stimulus Efforts

The key takeaway from this is that the effectiveness of Beijing's latest attempt to boost markets, lasting just around 10 days, is the shortest yet. This suggests that the market has called Beijing's bluff, leaving Xi with two options: either attempt another stimulus with the limited measures already announced, which will likely achieve nothing and potentially trigger another market crash and economic meltdown, or follow the advice of Goldman trader Borislav Vladimirov, who suggested that China must implement quantitative easing now, or risk falling into a deeper hole in 12 months.

Future Predictions

Given that half-measures are no longer an option for Xi, especially if he wants to avoid a deflationary spiral, social upheaval, and political revolt, the only option left is a drastic one. The question now is when this will happen. While the market may have peaked at +30% the first time China tried to boost markets, the next time could potentially see triple-digit increases, not to mention a significant rise in the value of gold and bitcoin.

Bottom Line

The recent developments in China's and Hong Kong's stock markets highlight the complexities and risks involved in implementing economic stimulus measures. The market's reaction to these measures can be unpredictable and can have significant consequences. So, what do you think about these developments? Do you think China will resort to drastic measures to stimulate its economy? Share this article with your friends and let's get the conversation started. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.