The Chinese market has struggled since 2020 due to COVID-19, real estate issues, and tech company crackdowns. Recently, Indian markets have corrected, mainly because of the Israel-Lebanon conflict, US recession fears, and changing investment patterns. Additionally, foreign investors are shifting funds from India to China, attracted by lower valuations.
However, doubts persist about the long-term sustainability of China’s market rally. In just one week, foreign investors sold shares worth nearly 31,000 crores in India. This brought the total sales to around 42,000 crores since September 27th, when a key policy decision was announced by the People’s Bank of China.
Despite this selling pressure, domestic institutional investors were able to support the market. During this phase they bought equities worth about 40,000 crores, largely offsetting the foreign outflows. This dynamic highlights the growing importance of domestic investors in stabilizing the Indian market during periods of foreign selling.
PE Ratio of Global Markets
Recent market trends show the Indian stock market is highly valued. The Indian market’s price-to-earnings (P/E) ratio stands at 26.85, making it the most expensive globally. US markets follow closely with a P/E of 26.06. In contrast, Chinese stocks appear much cheaper, with a P/E ratio of just 10.65.
These valuations reflect different economic conditions and investor sentiments in each country. High P/E ratios often indicate strong growth expectations. However, they can also suggest overvaluation. On the other hand, low P/E ratios might signal undervaluation or economic challenges. Investors must consider these factors when making decisions. They should also look at other metrics and market conditions. While P/E ratios provide useful insights, they are just one piece of the investment puzzle.
Stimulus by the Chinese Government
China’s central bank has introduced new monetary stimulus measures. Governor of People’s Bank of China Pan Gongsheng announced the following steps to boost consumer spending and investor confidence. The bank cut a key interest rate and lowered bank reserve requirements.
The People’s Bank of China also reduced mortgage rates and minimum mortgage down payments for second-time homebuyers from 25% earlier to 15%. HSBC predicts Beijing will spend one trillion yuan($142 million) on consumer goods and construction projects. This move aims to directly stimulate the economy. Another trillion yuan may go towards bank recapitalization and local government debt relief.
While this won’t immediately boost the economy, it could prevent financial risks. These actions show China’s commitment to economic recovery. However, their long-term impact remains uncertain. The government hopes these measures will revive the struggling property sector which contributes to 30% of the country’s GDP (Gross Domestic Product) and increase overall economic activity. Only time will tell if these efforts will yield the desired results.
Additionally, the Chinese government plans to issue special bonds worth 2 trillion yuan ($284 billion), Reuters reported on September 26th. This move aims to boost economic activity through a new fiscal stimulus package. The government will use these funds to offer subsidies for household appliance purchases.
They will also support businesses in upgrading equipment. Additionally, the plan includes a monthly allowance of approximately 800 yuan ($114) per child for families with multiple children. This allowance starts from the second child onwards. The initiative seeks to increase consumer spending and drive economic growth.
Experts also believe these measures could help revive China’s slowing economy. However, some question their long-term effectiveness. The success of this stimulus package will depend on consumer response and market conditions. Only time will tell if these efforts will achieve the desired economic boost.
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Stock Market Reaction
Chinese stock markets have seen significant growth recently. The Hang Seng Index rose by 12% (20,632 to 23,099.78) from September 27th to October 7th. The Shanghai Composite Index gained over 8% by September 30th. Similarly, the Shenzhen Index closed up 10.67% on September 30th. (As per last updated data due to Cina National Day Holiday)
In contrast, Indian markets have experienced a downturn. The Nifty 50 lost 5.83% while the Sensex dropped 5.9%. Most sectoral indices fell 6-8%, except for IT and FMCG. Banking and energy sectors led the decline. However, the IT, Metal, FMCG, and Media sectors outperformed the Nifty 50.
This divergence highlights the changing dynamics in Asian markets. Foreign Investors seem to be shifting focus towards Chinese stocks. Factors like government stimulus and attractive valuations may be driving this trend. Meanwhile, Indian markets face challenges from global uncertainties and profit-taking.
Conclusion
The Chinese economy’s recovery remains a critical focus amid ongoing challenges from COVID-19, the real estate crisis, and regulatory crackdowns. Recent monetary and fiscal policies, including significant stimulus measures by the People’s Bank of China, aim to restore consumer confidence and stimulate economic activity.
With attractive valuations compared to other global markets, China’s stock market may continue to draw foreign investment, especially as FIIs shift focus from India to China. However, the sustainability of this rally depends on how these measures impact long-term economic growth. As Indian markets grapple with global uncertainties and profit-taking, the role of domestic investors becomes increasingly crucial in stabilizing the market, even as foreign capital flows fluctuate.
Written By Dipangshu Kundu
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