The collapse of the Chinese stock market by $6 trillion has become what can be symbolically described as the thunder of a terrible truth, the sound of which is stronger than any soothing and deliberately encouraging statements that, in general, the weather situation is favorable and there are no cataclysms capable of provoking serious long-term consequences are a real threat.

The mentioned truth is that there are no positive expectations about the prospects of the world’s second-largest economy. The symbolic ray of hope was swallowed up by the darkness of unfavorable realities. The current situation is a challenge for the government of the head of the People’s Republic of China Xi Jinping. It is increasingly difficult for the authorities of the Asian country to ignore the problems in the economy and downplay the degree of complexity of the realities by using so-called pacifying formulations.

The massive sell-off of the Chinese benchmark CSI 300 in January triggered its sharp drop of 40% over the past three years, exacerbating the situation in a market dominated by mom-and-pop investors. The government’s rescue package of measures to improve the situation, backed by about 2 trillion yuan ($280 billion), and the sudden decrease in the bank reserve ratio indicate that the authorities are trying to stop the current processes, which in some sense can be described as approaching to catastrophic forms of manifestation.

At the same time, China’s stock market wipeout may seem like a minor or superficial problem against the background of realities such as the prolonged crisis in the real estate sector and demographic downturn.

Beijing adheres to the policy of state control over financial commentary and economic data. Separately, it should be noted that the authorities are showing a tendency to tighten this approach. Against the background of this specificity of public administration, markets are a reminder of the problems faced by the real economy. In this case, many circumstances and factors are implied, including, among others, a drop in the cost of housing and an increase in tension in the sphere of global trade.

The selloff creates the risk of a decrease in consumer spending and a similar dynamic indicator of business investment. The implementation of the appropriate scenario will exacerbate existing problems, bringing them to a new level of complexity.

Frank Tsai, adjunct professor of international studies at Xi’an Jiaotong-Liverpool University in Suzhou, eastern China, says that repeating the mantra that China’s economic system is on the right track can do a lot to make this characteristic of the development vector a reality. According to the expert, Xi Jinping should think about the question of whether his political party’s perception of the current situation corresponds to the vision of the actual state of affairs that is inherent in Chinese and global investors.

Beijing had not shown concern about the state of the Chinese stock market at the official level for a long time. The last time the authorities demonstrated such concern was in 2015 when there was a different economic background. At that time, the government was ready for large-scale stimulation of the economy’s main driving force – real estate. The authorities have allocated more than 3 trillion yuan from the central bank’s funds for the demolition of old apartment buildings and the construction of new ones. Also in 2015, it was decided to sharply reduce interest rates, as a result of which consumer spending and business investment were stimulated. In October of the same year, the two-child policy was introduced. Against this background, investors’ interest in China has grown. The country’s GDP increased by 7% in 2015.

Last year, China’s economy reached an annual growth target of about 5%, but at the same time, it recorded the worst deflationary streak since the Asian Financial Crisis of the late 1990s. In December, house prices showed the strongest drop in about nine years. Also, the current realities are the decline in the population and the many unemployed graduates of educational institutions in China.

Beijing is ready to take measures to support the market but does not plan to use debt-fueled solutions to stimulate growth in the real estate sector and the economy as a whole. The political incentives are modest. There are also clear signs that the issue of ensuring national security is one of the priorities for Beijing, the importance of which is assessed by the authorities at about the same level as the significance of economic growth. Moreover, nowadays there is a tendency for an increasing concentration of power at the top of the Communist Party. This means that it is likely to be more difficult for government officials to respond to crises.

Jason Hsu, investment director at Rayliant Global Advisors Ltd, says that the change in Beijing’s political strategy was the reason for the withdrawal of credits from the market. Most of the lending was related to the real estate sector. Jason Hu noted that the scale of the current downturn of the Chinese economy is much larger than in 2015. The expert also said that the Asian country is experiencing a deterioration in well-being in all directions, against which a pessimistic vision of the future is being formed on a large space.

Currently, questions are being raised about the ability of China’s economic system to ever overtake the American one. Also realistic is the risk that the Asian country’s economy will face a state of stagnation, which was typical for Japan in the 1990s. It is extremely difficult to get answers to the relevant questions since restrictions on official information containing negative characteristics of the state of the economic system are increasing in China. Stock market data is the most objective picture of what is happening. This information is also more difficult to manipulate.

China’s economic downturn came at a time when the S&P 500 index soared to new records and Japan’s Nikkei 225 hit a 34-year high.

Christopher Beddor, deputy director of China research at Gavekal Dragonomics, based in Hong Kong, says that the stock market drop in 2023 is a clear signal about the state of the Asian country’s economy. In this case, a negative state of affairs is implied. The expert said that Chinese stock markets show positive dynamics when the acceleration of nominal economic growth is recorded. Separately, Christopher Beddor noted that investors have not yet seen signs of such a scenario.

Hu Xijin, the former editor-in-chief of the Global Times tabloid and a well-known influencer, opened a stock trading account last year with an initial investment of 100,000 yuan. His example turned out to be indicative in the context of reflecting the economic situation in China. Since opening the account, Hu Xijin has lost more than 70,000 yuan. His daily comments on the social media platform Weibo have become a kind of chronology of what is happening in the market. Hu Xijin said this week that Beijing should provide investors with the rewards they deserve.

The understanding of the need for urgent measures to save the economy is gradually being fixed among Chinese politicians. The country’s Prime Minister, Li Qiang, called for decisive action to stabilize the markets.

A package of measures to save the market for about 2 trillion yuan and the announced reduction in the standard of bank reserves can be effective solutions to overcome the crisis situation. In 2015, Beijing allowed China Securities Finance Corp., the main stabilization mechanism, to gain access to borrowed funds worth up to 3 trillion yuan for the direct buying of shares. This decision helped to keep the market range within acceptable limits. The price recovery began in mid-2016. At that time, the economy also began to show an improvement trend. Currently, investors are stating the need for more specific actions by the authorities. They also declare the need for changes in the political course concerning the economy to ensure a sustainable market recovery.

Beijing should provide macroeconomic incentives, in particular, to increase government borrowing and spending. The relevant solutions can increase domestic demand. Investors also expect the authorities to take measures to curb the downturn in the real estate sector. In this case, one of the solutions may be the allocation of money by the central bank to support construction projects.

Government campaigns, implemented in many spheres of activity and aimed at solving a wide range of tasks, including environmental protection and reducing the wealth gap, have caused significant damage to businesses in recent years. The low level of trust among private entrepreneurs can be improved by Beijing taking measures to improve the protection of property rights and provide more market forces with opportunities to allocate resources.

Investors are also interested in improving the situation in global trade and reducing geopolitical tensions, including in the context of relations between China and the United States.

Manish Bhargava, fund manager at Straits Investment Holdings in Singapore, says the path to restoring confidence and achieving sustained improvement in the stock market will be gradual and will require additional efforts from Beijing.

China’s top leadership is currently insisting on the need for a more sustainable model of economic growth and avoiding repeating the mistakes of previous downturns, when large-scale stimulus measures provided a short-term recovery, but contributed to the formation of a huge debt burden.

Belita Ong, Chairman of Dalton Investments LLC, says that Xi Jinping can act quickly when circumstances require appropriate promptness, mentioning in this context the sudden termination of quarantine caused by the coronavirus.

The deputy governor of the People’s Bank of China, Lu Lei, was asked at one of the meetings whether he was an investor and whether he identified himself with those who suffered during the collapse. The deputy head of the specified organization called this issue tough but fair. Such an answer can be characterized as a statement of the existence of problems. The relevant information was published by the media with reference to an anonymous insider. There is no more detailed information about Lu Lei’s response yet.

Li Bei, founder of the Shanghai Banxia Investment Management Center, noted that the Chinese authorities give priority to real economic growth, and markets are more focused on nominal growth, which has slowed due to deflation.

Beijing needs to come up with a new stimulus for the economy. This was stated by Alicia Garcia Herrero, a chief Asia-Pacific economist at Natixis SA, advising tight seatbelts.