Chinese Stock Market Rally at Risk

Stimulus by the Chinese government has provided a boost to its stock markets, but analysts are questioning how long this positive trend may continue.​

The Best Performance In Years

Chinese stocks achieved significant milestones in the past few days, supported by stimulus measures announced by the central government. The country's leading stock index posted its biggest daily gain on Monday since early 2008, achieving its best weekly growth streak since 2008. Investor sentiment improved ahead of the country's week-long national holiday, with markets closed until the following Tuesday. This locks in China's gains while US-traded stocks may continue reacting as investors assess the medium to long-term effects of factors driving growth.

Investors rushed to participate in the rally, with some frantic trading seemingly motivated by fears of missing out. This resulted from authorities in Beijing announcing their most aggressive stimulus since the pandemic, seeking to support the economy. A key announcement was a promised 50 basis point cut in interest rates. Home builders led gains following three cities easing restrictions on home purchases. The central bank also introduced new rules facilitating broker and fund access to funds for stock purchases. This contributed to widespread growth across sectors such as technology, e-commerce and internet companies like Tencent, Alibaba and Baidu.​

Can Gains be Sustained?

Now that the effects of the stimulus measures are wearing off, many analysts worry that the stock market gains may not be sustainable, at least in the long term. There have previously been increases in Chinese stock prices following stimulus announcements which then diminished over time. Considering disappointing manufacturing data at the start of the month, it is still early to see if there has been a lasting change in foreign investment, which typically supports sustained increases in Chinese stock prices.

Those with a pessimistic view warn that while generating optimism, the stimulus measures have not addressed structural issues in the economy, such as the mismatch between areas with strong housing demand and those with excess supply, and ongoing weakness in credit demand. However, optimists are not rushing to sell their stocks. In fact, they argue there is potential for further price rises as the gains could force those who had bet against stocks to close their positions. At least in the short term, the rally does not appear to have ended, as share prices in Hong Kong surged even higher on Tuesday. HK did not observe China's national holiday.

After three years of falling prices, Chinese stocks are seen as good value and provide attractive entry levels. Analysts will closely monitor whether the stimulus measures, especially for the property sector, have an ongoing impact over the coming months to determine whether stock price increases can be maintained in the long run.​

Baidu Bottomed Out?

Baidu has been on a tear recently after bouncing off $80 after completing an ending wedge pattern. Having surpassed $100, and if it rises above $115, the peak of the wedge, it could next reach the swing low of $123 from August 2023 and eventually $150 in the longer term. Conversely, if support at $100 is lost, it could fall to $90 or the prior low.​

Source: SpreadEx BAIDU.COM

Key Takeaways

Chinese stocks achieved significant gains last week, supported by new government stimulus measures. Authorities announced aggressive stimulus measures, which drove growth across sectors such as technology and internet companies. However, some analysts are concerned the rally may not be sustainable in the long run due to structural economic and housing supply issues, contrasting views for further price increases. Analysts will monitor the ongoing impact of stimulus, especially in property, to determine if stock price increases can be maintained over the coming months.​