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China’s 15% Stock Slump Shows What Happens When Stimulus Ends

(Bloomberg) – China’s stock market is showing the world what happens when central banks and governments start to pull out of pandemic-era stimulus, and it’s not pretty: The CSI 300 Index has lost a 15% since rising to a 13-year high last month as concerns about tighter monetary policy replaced optimism about the economic recovery. As elsewhere, the rally had been led by investors chasing a small number of stocks, many of which piled high on top as the frenzy grew. Now, the indicator lags behind MSCI Inc.’s global benchmark for the most part since 2016 this month and the most popular mutual funds are being crushed. dollars in stimulus. Some, like the Federal Reserve and the European Central Bank, have said they will stick to their flexible policies for now. Others are forced to act on inflation risks. Last week, Brazil became the first nation in the Group of 20 to raise borrowing costs, with Turkey and Russia following suit. Norway is also becoming more aggressive. In February, investors began to price in higher US growth and consumer prices, voicing their views on how soon the Fed would be forced to raise interest rates. While that means technical corrections in overvalued markets like the Nasdaq, none of the world’s leading stock indices are falling faster than China’s. “China’s stock market crash may reveal the challenge for global stimulus withdrawal as China is ‘first in, first out’ in the pandemic,” said Peiqian Liu, China economist at Natwest Markets in Singapore. China has reason to cut the stimulus faster than other major economies. Tighter control of the pandemic, a fixation on deleveraging and the lack of investment options for its citizens are some of them. But there is little doubt that the nation’s stock market has led the way since Covid-19 was first detected in the Chinese city of Wuhan. When the virus began to take root in the first two months of 2020, the CSI 300 plummeted 12%, while globally. stocks continued to climb to new highs. When the MSCI All-Country World Index began to sink a few weeks later amid evidence that the virus was spreading globally, China’s stock market was already on the mend due to optimism that more stimulus was ahead. In July, the rally had made local equities among the hottest in the world. China’s index peaked on February 10, after rising 65% from last year’s low, before sinking. Analysts at Credit Suisse Group AG lowered their recommendation on Chinese stocks to the equivalent of selling this week, saying the country’s markets are likely to “see a greater recovery” than other benefits seen during the pandemic. That’s the second downgrade. from the Chinese stock market in five weeks. “We made our gains in China A-shares in early February, given the outlook for tighter domestic macroeconomic policies,” Jean-Louis Nakamura, Asia Pacific Investment Director at Lombard Odier Darier Hentsch wrote in a client newsletter this week. The CSI 300 fell as much as 0.9% Thursday before erasing losses. Last time it was up 0.2%. The Communist Party has good reason to be concerned about excessive stimulus. When the global financial crisis struck in 2008, China turned to credit to boost its economy. The resulting accumulation of debt to this day threatens the stability of the country’s financial system. The inflows of stocks and bonds on land last year are also fueling concern among officials about distortions in asset prices, especially if money starts to flow out. Lessons from the past mean there is a greater focus on China on the risks caused by too much liquidity. both domestically and abroad. The government has reactivated a campaign to reduce leverage that was shelved amid the trade war with the US, as well as efforts to limit the impact of “hot money.” “China’s exit from politics remains one of the most important uncertainties to its own recovery and financial markets lie ahead,” wrote Li-Gang Liu, managing director and chief economist for China at Citigroup Inc., in a report. this month (updates with today’s operations in the 10th paragraph). For more articles like this, visit us at bloomberg.comSubscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP

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