Chinese Plan Halts Market Drop

Some Asian stocks gained on Wednesday after reports of Chinese authorities preparing a rescue package to stabilise the stock market following a drop to multiyear lows. The Hong Kong index (HSI) soared over 3%, partly supported by Jack Ma's substantial share buyback of Alibaba (BABA) stock.  

In addition, exports from Japan to China rebounded for the first time in 13 months. Japanese markets were down on Tuesday following hawkish signals from the BOJ. Nikkei (Japan 225) added to recent losses on Wednesday as markets increased the chances of an interest rate hike in April.

Stock Market Drivers 

Asian stocks rallied on Wednesday as Chinese authorities consider injecting 2 trillion yuan ($279 billion) from state-owned enterprises to buy shares and support the market. The rescue funds are expected to halt the bearish price action in the short term, but a more tolerable recovery might need clarity on what the stimulus policy details. Chinese authorities also announced plans to cut banks' reserve requirements ratio (RRR) by 0.5% to stimulate lending, with the People's Bank of China (PBOC) going as far as to declare the injection of around $140 billion into the system.

Besides the authorities-led market drivers, Alibaba surged over 7.3% after news that the company's co-founders Jack Ma and Joseph Tsai had bought around $200 million worth of shares, supporting market sentiment. However, Alibaba's share price has dropped by about 21% since it revoked plans to spin off its cloud business in the final weeks of 2023. Jack Ma had also sold around $870 million worth of shares around the same time. Yet, recent 2023 exchange filings show share buybacks totalling some $9.5 billion, bringing down the quantity of Alibaba shares by 3.3%.

Finally, during Tuesday's meeting, the BOJ signalled that its negative interest rate policy (NIRP) was near ending. The bank added a phrase in its report that the likelihood of hitting its 2% inflation target "continued to rise gradually". It added that one of the risks that could delay a policy exit would be a slowdown in Chinese growth, which would hurt Japan's economy.

In that context, according to Wednesday's data, Japan's exports rose by 9.8% in December, exceeding analysts' estimates. Exports to major partners in the US, EU and China increased substantially, with China finally rebounding for the first time after 13 full months. Shipments to China, Japan's largest trading partner, grew 9.6% in December after falling for the year prior due to China's economic slowdown. As a result, the Nikkei 225 index fell 0.8% on Wednesday amid the positive export numbers.

Details of the Rescue Plan

According to some sources, Chinese regulators have informally requested some hedge funds to restrict the short-selling of stock index futures in an attempt to stabilise falling stock markets. While no specific curbs were noted, the regulators implied shorting activity in stock index futures would be confined. The request from the China Financial Futures Exchange (CFFEX) came after CSI 300 futures fell to a maximum of 10% on Monday, spurring renewed government promises to support the market.

But China's stock market has been in decline for a while now. The CSI 300 index has in fact lost about 42% of its value since 2021, and Hong Kong's index is down around 48% over the same period. 

Following renewed calls from China's State Council, the government plans a $280 billion bailout by enticing state-owned firms to buy shares. The stimulus plan does not just aim to support the stock markets, but also the struggling economy in China post-pandemic. Chinese stocks have lost around $6 trillion in value since then.

Aside from state-owned companies buying to prop up the market, regulators limited securities lending and scrutiny on arbitrage and quantitative trading. Also, they encouraged long-term investors to bump up their investments in equities. Some banks and firms have already gone ahead with picking Chinese stocks, hoping for more prospects from the rescue plan. 

Future Outlook

Chinese Securities Regulatory Commission Chairman Yi Huiman may have committed to defend the stable capital market operations. However, analysts caution that the rescue plan may not be sufficient to benefit investors much, and China could still encounter difficult times ahead. Investors also remain sceptical due to China's economic growth concerns. Data show that the property sector has sunk, and more recent prints have been largely underwhelming.  

While the Chinese government wants to stabilise stock markets to support the middle class, experts believe the economic reforms that give the market more freedom from political control are what China needs to solve its stock market woes. For context, China's property sector, which accounts for a third of China's GDP, has slowed due to credit crackdowns. Some even estimate that the GDP figure of 5.2% in 2023 was closer to 1.5% due to property and government debt problems. So, the government may announce a modest growth target of 5% for 2024, supported by government spending. This may keep structural issues challenging. (Source: The Guardian)

Conclusion

Most Asian markets rose on the day, led by gains in Hong Kong following reports of Chinese stimulus and support from Alibaba buybacks. The exception? Nikkei. It follows BOJ's policy narrative shift on Tuesday and better export data supporting it early Wednesday. While the short-term focus may be market drivers, investors remain sceptical without China's stimulus plan details.