Last week, I summarized the bearish case for the Chinese rally. Today, I’ll explore a counter-narrative which posits that the CCP might do all it can to ensure a prolonged equity boom.
As you are no doubt aware, China’s economic outlook has been heavily influenced by a new policy stance aimed at stimulating equity markets rather than focusing primarily on the broader economy or infrastructure investments. This approach diverges from the more traditional Western model, where policies focus on macroeconomic fundamentals and the stock market reacts to broader economic signals. The core idea being discussed here is that the Chinese government has embraced an equity-first strategy to stimulate economic recovery, with the stock market acting as a lever to boost domestic confidence, especially among urban millennials.
The Role of the Renminbi and Monetary Policy
Historically, Chinese authorities have placed a significant focus on maintaining the strength of the renminbi. A strong renminbi has typically preceded periods of bullish stock markets in China. In contrast to the U.S., where policymakers prioritize equity markets, Chinese policymakers have been more concerned with the stability of the currency and bond market. This is reflected in the strong performance of Chinese government bonds, which have outperformed U.S. treasuries and European bunds in recent years. However, as of 2024, with the renminbi maintaining relative strength, Chinese authorities appear ready to shift focus toward equities as a key driver of growth, supported by policy loosening, low interest rates, and favorable conditions like low oil prices.
Structural Challenges and “Hunger Games Capitalism”
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