China hopes to keep stock markets afloat with billions in state aid

It's raining economic announcements in China this week. Chinese Premier Li Qiang on Monday promised to take “strong measures” to restore market confidence after a cabinet meeting.

Bloomberg News reported on Tuesday that Beijing is working to create a stabilization fund worth 260 billion euros to buy shares in Chinese stock exchanges. On Wednesday, in an unusual press conference, the Central Bank announced a reduction in banks’ reserve requirements.

Many investors believe that Beijing is not implementing enough structural reforms to the Chinese economy, which is suffering from a real estate crisis, low consumer confidence, signs of deflation and geopolitical tensions.

Officially, the Chinese economy grew by 5.2 percent last year, but strict data and financial restrictions make it unclear how reliable this figure is. Research group Rhodium Group assumes growth of 1.5 percent.

Buying shares

Analysts also reacted skeptically to the Chinese government's plan to buy shares from the state-backed stabilization fund. The money allocated for this – 260 billion euros – will come from the external reserve funds of state-owned companies.

Major Chinese funds and insurance companies have already been banned from selling shares. The Chinese government has used this recipe often in the past, such as in 2015, when it wanted to prevent a stock market crash.

This government injection may have an impact in the short term, but it does not change confidence in the long term. According to economists, the latter can only be achieved through further stimulus measures and reforms, but this is difficult in Beijing.

Limited success

“Government purchases (of stocks) have historically had limited success in changing market sentiment if not followed by additional measures,” said Marvin Chen, a Bloomberg Intelligence analyst.

Given the limited prospects for improvement, more and more investment funds are withdrawing from China. Veteran hedge fund manager Chua Soon Hock announced the closure of his €300 million fund this week after losing 19 percent in one month.

“I have lost my confidence as a stockbroker,” he wrote in a letter to his clients. “I still don't understand why China's policymakers are so inconsistent and not fighting deflation.”