Chinese stocks have their worst day since the pandemic

Chinese stocks fell the most in a single day since the pandemic, amid fears the government’s measures to revive the second largest economy of the world will fail.

The Shanghai Composite Index, China’s benchmark index, dropped 6.6% on Wednesday. Meanwhile the blue-chip CSI 300 index fell 7.1%. This is the largest percentage drop in a single day since February 2020. Hong Kong’s Hang Seng closed 1.4% lower.

The steep sell-off follows a rally on the Asia Pacific stock markets after the Chinese authorities announced stimulus measure last month, including interest rate reductions.

After China’s Golden Week holiday, traders sold their stocks amid speculation that the Ministry of Finance would announce new policy measures on Saturday.

In an effort to boost growth and revive consumer spending, the Communist Party of China has launched the largest economic stimulus package in the country since the pandemic. This includes a reduction in borrowing costs and mortgage rates.

Chinese stock prices soared by over 20 percent in response to these measures as investors bet that the monetary ease would mark the beginning of a larger package of stimulus policy.

After two years of lockdown policies, economists say that more aggressive and direct measures are needed to encourage consumers to spend. Shivaan Tandon is a markets analyst with Capital Economics. He said that to restore investor confidence policymakers need to provide more substantial fiscal support and detail about its implementation.

While it is likely that the policymakers will provide some additional support, it’s unclear whether this will be enough for the stock market to rally again or achieve the needed rebalancing away from investments and towards consumption.

A performer during Golden Week in Beijing. There are growing concerns that the stimulus package of the state will not be able to ignite the economy.

China set an official growth target of around 5 percent after the pandemic. This is a goal it will likely miss this year. According to World Bank estimates, growth is expected to drop to 4.8% this year from 5.2% in 2023 and then to 4.3% in 2025. The policymakers also have to deal with deflation or falling prices which increase the debt burden for households and businesses.

Aaditya Matoo, World Bank’s chief economist for East Asia, said: “The question is if [the stimulus] will actually be able to offset consumer concerns regarding declining salaries, declining property incomes and fears of falling ill, getting old or becoming unemployed.”

President Xi Jinping is reluctant to use more aggressive fiscal policy tools, and instead has focused on reviving China’s economy using the traditional export and industrial model.

Erik Lueth is an emerging markets economist with Legal & General Investment Management. He said that consumers are stuck in a “liquidity trap” where they’re “sitting around on houses worth less than what they thought it was worth and the unemployment rate is high.” People aren’t spending as much and instead want to pay off their debt. “Monetary policy is not effective in this situation.”