Beijing finally reached the pain threshold.
Following a series of dramatic sessions during which Hong Kong shares capped a rolling bear market with an existential spiral, China’s top policymakers pledged to restore stability in a series of statements that triggered a monumental rally.
Xinhua described a meeting of the State Council’s Financial Stability and Development Committee, chaired by Vice Premier Liu He. China directly addressed the slide in Hong Kong shares, and attempted to reassure market participants around the future of US listings.
“The meeting urged enhanced communication and coordination between the regulators of the Chinese Mainland and the Hong Kong Special Administrative Region to maintain the stability of the financial market in the HKSAR,” Xinhua said, adding that authorities should address issues that “draw attention” from capital markets in a “timely” manner. All policies that have the potential to “significantly impact” capital markets must be “coordinated with the financial regulatory authorities in advance” in order to manage expectations, which should be “stable and consistent.”
The Hang Seng exploded to the upside Wednesday. The city gauge’s 9% single-session gain was the largest since the financial crisis (figure below).
On Monday, city equities, including and especially H-shares and big-cap tech names, gave up the ghost, plummeting in a capitulatory rout that had “panic” written all over it. JPMorgan called Chinese tech “univestable.” On Tuesday, both city and Mainland shares suffered a veritable meltdown.
Suffice to say Wednesday’s verbal intervention from Beijing sounded like a game-changer, all caveats aside. “On the regulation of US-listed Chinese firms, the State Council said Chinese and US regulators have maintained good communication and made positive progress,” Xinhua said, adding that both sides are “working on a concrete cooperation plan.” Beijing went further. “The Chinese government will continue to support various enterprises to seek listings in the overseas markets,” Xinhua wrote.
The beleaguered Hang Seng Tech Index, which had fallen nearly 70% from its February 2021 peak, rose an astounding 22% on Wednesday (figure on the left, below). The gain wiped out all of the losses logged during the previous three sessions.
H-shares jumped almost 13%, the most in some 14 years (figure on the right, above). Note that the gauge dropped the most since 2008 on Monday and notched a similarly unnerving decline during Tuesday’s wipeout. Those losses are now recouped.
Beijing appeared to message the end of the crackdown on mega-cap tech companies. Market participants have seen any number of false dawns on that front over the past 12 months, but it sounded serious this time. “As for the platform economy, relevant departments should… steadily advance and complete the rectification work on companies as soon as possible,” Xinhua said. Regulation should be “standard, transparent and predictable.”
Mainland shares rallied hard. The CSI 300 jumped more than 4%, erasing most of Tuesday’s losses. The ChiNext rose more than 5%.
None of this solves China’s COVID outbreak, but Beijing also addressed the broader economy, as well as the property sector, prodding the PBoC in the process. “Concrete actions must be taken to bolster the economy in the first quarter,” according to Liu. Monetary policy “should take the initiative,” he said. Later, the PBoC released a statement of its own, pledging to assist in the implementation of all desired policies.
After spending most of the last 15 months decimating Hong Kong-listed Chinese tech shares and otherwise undermining investor confidence, Xi appears to have belatedly recognized the folly inherent in engineering a total collapse of the equity market. Either that, or he’s finally satisfied that everyone — from China’s homegrown tech moguls to foreign investors — got the message.
Depending on which of those two explanations you prefer, you could say Xi bowed to markets or vanquished them and is now prepared to let investors sift through the smoldering ashes undeterred by the threat of a renewed crackdown.
Whatever the case, investors will take it. This is an extremely delicate juncture not just for China, but for the global economy more generally. A Beijing that’s suddenly a friend of capital would be a boon. Of course, skepticism abounded on Wednesday. The gains in Hong Kong were doubtlessly turbocharged by a short squeeze which one imagines was epic, but beyond that, expect plenty of “we’ve heard this before” banter from disheartened investors who’ve lost fingers (plural) catching falling knives in Hong Kong.
But, again, I’d suggest the overall tone of Xinhua’s account betrayed a palpable sense of urgency. It’s rare that top Chinese policymaking bodies resort to the kind of explicit and, more notably, specific, vows vis-à-vis financial assets. Take it for what it’s worth. On Wednesday, it was worth a lot.
There may be some strategy here. China is playing whack-a-mole with monsters right now (Covid, crumbling markets, crazy Putin, crazy US, commodities mess, etc). Domestic market chaos tied to policy is the one monster problem Xi can actually solve, or at least sideline, now. Which will help provide some freedom to navigate while figuring out how much relief he can provide Russia under the constraints of the other monsters).
On a related note, Xi is facing significant internal debate about whether his Russia policy is well-founded, given Russia’s performance in Ukraine, and one interviewee pointed out that if Putin fails, then Xi would look that much worse for pushing this partnership. Maybe. But if Putin is removed from power, then two things will be true: any successor is unlikely to be his equal, and that successor will have a vast set of problems on his plate from the get-go. That would bode well for China’s ability to control the partnership rather than end it. Despite the current chaos, Russia’s mineral wealth isn’t going anywhere and China is still better off with Russia as partner against the US rather than as an adversary to the north (minding the historical antipathies of these two neighbors).
Good points there Uptowner. But a different read may be that other Politboro members may have stepped in and forced Xi’s hand. Perhaps they finally had enough of the damage from Xi’s “Common Prosperity” moves, Covid strategies and foreign policy blunders.
Not an all-clear, however. Weakened despots can act irrationally. And the successors may be even worse.
This is a move of the big China tech names, not broader Chinese markets, e.g. compare BABA to 939-HKG. After this monster squeeze is done, the rectification of platform companies will continue. Covid will still spread and/or force lockdowns. Global demand will continue to slow. US audit requirements are hardly likely to be eased.
yes, my preferred explanation is Xi trying to smooth off China’s tacit support for Russia at present with domestic economic support and relief… would love to be wrong on this…
Well, glad I didn’t capitulate on my China tech shares. But not sure I want to add. Confidence isn’t totally restored by a long shot.
If Xi starts using the PPT Playbook Americans benefit from, it won’t be long before Sleepy Val joins the game. A untied world of economic fantasy played at casinos from east to west, dovetailing together a new world order of mutual greed and successful risk free, carefree wonderment. Ding dong the yuan is dead and hooray for Hollywood, let the good times role.
The Xi put had a much lower strike than any of Powell’s puts thus far.