Central bankers like long public holidays. They are the best time to announce a significant change in policy that is intended to change market behaviour – when they get the biggest bang from a big bazooka. What better time than the natural slowdown just before the “
golden week” national holiday?
The results
were spectacular, with the FTSE’s China A50 Index rising about 24 per cent in just one week following the announcements. Hong Kong’s market went up only around 16 per cent. These historical reactions contrast with the severe underperformance of the Chinese markets since the Covid-19 restrictions ended.
Before last week, the China A50 was down by about 45 per cent since its peak in February 2021. Meanwhile, the Hong Kong stock market had fallen four calendar years in a row. Investors had capitulated.
The slowdown was not for lack of attention by Beijing, for over
US$1 trillion worth of measures to reflate the economy and support the stock market have been carried out over the last year. However, the hoped-for substantial bailout of the big property companies had not materialised, and the reflationary measures were readily absorbed by the markets – and too unheralded to move the needle.
There has been a sensible reluctance by the mainland authorities to risk side-effects based on the law of unintended consequences and pour large amounts of liquidity into the economy. In the past, vast amounts of cash has been swallowed up in property and stock market bubbles. The resultant crash after the sugar high has led to crises in local government and property company finances that have been worse than any potential slowdown.
Central banks in the West seemed to have learned that economic pump priming must be accompanied by a big pulse of news to shock economies into recovery. The West has injected a great deal of liquidity into their economies in the last couple of decades to stave off recession.
