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Today’s market performance raises some concerns. In China, the stock market opened high but saw its rally fizzle out, closing lower than its earlier gains. The Shanghai Composite closed 4.6% higher, and the blue-chip CSI300 index rose by 5.9%. Despite these notable gains, they were far below the more than 10% increases seen earlier in what turned out to be a rollercoaster day, with turnover reaching a record 3.45 trillion yuan.
Meanwhile, the Hong Kong stock market also fell sharply. The Hang Seng Index opened 250 points lower and at one point plunged 2,336 points, reaching an intraday low of 20,762. By the end of the day, it closed at 20,926, down by 2,172 points or 9.4%. All blue-chip stocks were down, with the H-shares index dropping 847 points or 10.2%, and the Hang Seng Tech Index closed 12.8% lower at 4,695 points. Total market turnover hit an all-time high of 620.4 billion Hong Kong dollars.
But here’s a question for everyone: Do you think the Chinese government will stop after injecting funds into the market? Is it likely that they would throw in a large amount of money and then just leave things as they are? I don't think so. Would any government be foolish enough to inject so much capital and then completely ignore what happens next? If they did, we might as well give up on A-shares altogether, right? That’s just not realistic. Unless the government is utterly incompetent, they will certainly take follow-up measures.
Market interventions typically unfold in two phases. First, the government injects capital, creating a liquidity-driven rally. This initial wave of liquidity has already happened, with some stocks rising over 38%. Naturally, after such a rise, there will be a pullback. But after this pullback, will more funds flow into the market? From a logical perspective, it’s hard to imagine that the Chinese government would stop at just one or two rounds of capital injection. They will likely continue to provide financial support.
Let’s consider how the U.S. responded to the COVID-19 pandemic. The Federal Reserve repeatedly cut interest rates and rolled out unlimited quantitative easing (QE) to support the stock market and the economy. The Fed continued to inject capital, which eventually stabilized both markets and the broader economy. Given that China’s economy and stock market have been weak for a long time, expecting a full recovery from just one or two rounds of capital injections seems unrealistic.
Therefore, in addition to capital injections, the Chinese government will need to introduce further supportive measures aimed at stimulating the economy and creating a more favorable economic environment. This transition from a liquidity-driven rally to an economy-driven rally is crucial for sustained market growth. Liquidity alone can push the market up in the short term, but for the rally to continue, the economy itself must recover. If that happens, the stock market can continue its upward trend.
Looking back at the history of the Chinese stock market, we can see that it experienced significant rallies in both 2005 and 2014, but both were followed by large corrections. In 2005, the global financial crisis hit, and economic conditions didn’t support the rally. In 2014, the market’s growth was cut short when Donald Trump was elected, and U.S. sanctions on China led to another downturn.
This time, however, the situation is different. The current market rise is being driven by liquidity. Now, we need to see whether economic recovery can follow. If the economy continues to improve and the liquidity-driven rally transitions into an economic recovery, then investing in the Chinese stock market or related ETFs could still be profitable. However, for now, I would advise against rushing into the market. It’s better to wait for a more stable opportunity.
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