China and its incentives: short-term gain, long-term problems?

China and its incentives: short-term gain, long-term problems?

In 2024, China's economy faces one of the biggest crises in decades. A crisis in the property sector, low domestic demand and weakened consumer confidence have led the government to launch a massive stimulus package of around 7.5 trillion yuan ($1.07 trillion). These measures include interest rate cuts, support for capital markets and significant government intervention in the banking sector.

What does the stimulus package include?

The Chinese government has taken several key measures:

1. Interest rate cuts - Interest rates have been cut by 20 to 50 basis points to encourage lending and consumption, particularly in the real estate sector. At the same time, the minimum down payment for second homes was reduced to 15%.
2. Capital injection - Over 1 trillion yuan was injected into the banking system to increase liquidity and stabilise financial institutions.
3. Supporting capital markets - The government introduced measures to encourage share buybacks and inject funds for share purchases, which led to the CSI 300 index rising by over 25%, the largest increase since 2008.

A rapid rise, followed by a sharp fall

Although China's stock markets experienced a sharp rise, it was soon followed by a dramatic decline, one of the largest since 2008. The stimulus had only a short-term effect, while longer-term structural problems such as the property crisis and weakened consumer confidence remain unresolved.

Despite this, the solid performance of equities thanks to the stimulus

Despite these fluctuations, Chinese stock markets remain relatively strong in the end. The Hang Seng Index is up less than 20% since the beginning of the year, mainly due to recent government intervention and support for capital markets. This growth is the result of artificial support, and it is questionable how long it can be sustained without further stimulation.

Impact on the global economy and European competition

An interesting aspect is that China's problems have not yet provoked any significant reaction in global markets. Nor has the fear of Chinese investors had a significant impact on the US or European markets. This phenomenon points to the robustness of other global markets that have not yet felt the effects of the Chinese crisis. On the other hand, despite its internal problems, China is still able to outperform Europe in many areas, particularly in manufacturing, exports and technological development. Chinese firms continue to dominate global manufacturing and maintain a significant influence despite domestic challenges.

Why are we avoiding China?

Despite the very attractive valuations of companies such as Alibaba or Pinduoduo (you will know the Temu subsidiary in the Czech Republic). Our investment strategy focuses on long-term stability also in terms of the functionality of the whole market, and therefore we see the Chinese market as too risky. The main reasons are:

1. Overstimulation of the economy - The Chinese economy is increasingly dependent on government stimulus, which is distorting its natural growth and leading to overheating.
2. The demise of the free capital market - China's free capital market is increasingly controlled by the government, limiting the scope for natural dynamism and growth.
3. Structural problems - The real estate crisis, an ageing population and weakened consumer confidence present profound challenges that cannot be addressed by short-term stimulus alone.

For these reasons, Chinese equities and ETFs remain on the periphery of our focus for now.
 

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Disclaimer:

This article is provided for informational purposes only and should not be considered investment advice, a recommendation to buy or sell securities or any other financial products. The authors make no representations as to the accuracy, completeness or timeliness of the information contained in this article. Readers should consult a financial advisor or other professional if they need specific investment advice or if they have questions about their financial decisions. The authors of this article are not responsible for any loss or damage caused by the use of the information in this article. Past years' profits are no guarantee of future profits.