China mulls $278bn lifeline for sinking stocks while US market hits record highs

China is currently facing severe issues with its stock market. The Hong Kong exchange plunged to its worst in almost 20 years. A contributing factor to this downturn was the People's Bank of China's decision on Monday to maintain current interest rates, which discouraged investors.

The severity of the situation led Bloomberg to report that Chinese authorities are contemplating injecting approximately $278 billion (about 2 trillion CNY) into the market. This intervention would engage state businesses and exchanges in Hong Kong, Shanghai, and Shenzhen. However, Bloomberg's informant states that final decisions are yet to be made, and the Chinese body overseeing the exchanges has not commented on the issue.

The proposed intervention would consist of rerouting funds held by state-owned companies overseas back to the domestic market to finance purchasing stocks. In addition, the ban on short-selling will be extended to insurers as well. Up until now, such a ban has only been imposed on certain investment funds - as stated by mBank experts.

"The financial support should momentarily halt the decrease and stabilize markets," assesses Marvin Chen, an analyst at Bloomberg Intelligence. However, he underlines that previous governmental interventions have not significantly impacted reversing market trends.

The challenges confronting the Chinese economy include a real estate market crisis, a reduction in foreign investment, and low entrepreneur sentiment.

Reuters asked international experts to evaluate China's situation. The majority agree that China needs to commit to more decisive structural measures, as intervention could only provide temporary relief. "Until a significant crisis occurs, the Chinese government may simply extinguish a fire with cups of water instead of using something substantial, which will probably become necessary," - evaluated one expert.

"As a Chinese investor, you would likely think: wait a second, if the central bank doesn't want to lower rates by even 25 basis points, we must be far from any substantial action" - another added.

Data from China drastically contrasts with the numbers from the United States. The S&P500 index recorded a historical peak of 4842 points on Monday, outdoing results from the beginning of 2022. In 2023, the S&P gained approximately 25 percent. Other data suggests even this record could be surpassed.

XTB experts, in their analysis, note that the recent readings of the US economy, barring weaker regional indices, indicate that the job market is robust, and inflation expectations are falling.

"All of this forecasts cautious cuts in 2024, which seem to favor Wall Street and possibly the US dollar, considering that currencies are always priced relative to other currencies. Many indicators suggest that USD's advantage over EUR will continue," they write.