Chinese markets suffer a dismal start to the year

As Chinese marketsCSI CSI GDP came crashing down at the start of 2025, a joke circulated among investors: “What is the most valuable asset in the market?” The answer, they replied with a chuckle, was “retail investors”. stockmarkets are dominated by amateurs. They buy high and sell low, helping the professionals eke out a living. They also seem to be in endless supply, no matter how much money is lost. “They get cut down like leeks but grow right back,” goes a popular saying.Although retail investors will have suffered most in the recent sell-off, many others are being cut down, too. stockmarkets experienced their worst first day of trading since 2016 as the 300, a benchmark index, fell by 2.9% on January 2nd. It then continued to fall. Over the first four trading days in 2025 it was down by over 3.5%. At the same time, yields on long-dated Chinese government bonds have cratered. Those on ten- and 30-year government bonds hit record lows on January 6th. On the same day the yuan sank to 7.33 to the dollar, a 15-month low.There is no shortage of explanations for the gloom. One is uncertainty linked to the fast-approaching second term of Donald Trump, which starts on January 20th and brings with it the possibility of a raft of new tariffs on Chinese exports. Another is that patience with a state bail-out is evaporating. In September regulators promised to take swift action to solve China’s biggest problems, such as a property crisis and highly indebted local governments. Talk of a hefty stimulus package at the time pushed up the 300 by more than 25% in a week or so of trading.However, the state’s delivery has since been underwhelming. The biggest component of the stimulus has gone to paying off local-government debt. Although home sales in a handful of the biggest cities rebounded in the final weeks of 2024, compared with the previous year, the vast housing inventory in smaller cities means that national sales will probably continue to decline in 2025. So will prices. As long as China’s housing market continues to struggle, sentiment among ordinary folk will be tough to revive. Goldman Sachs, a bank, has recommended that investors look to Japan’s “lost decade” as a guide to the future of the Chinese stockmarket.Movements in the bond market have worried global investors. China’s regulators have been dealing with falling yields for months as local investors scramble for a haven, with many piling into government bonds. Cuts to the deposit rate have prompted people to shift their money from banks to fund managers. This trend is one factor that prompted investment funds to become the biggest buyers of bonds last year, according to Standard Chartered, another bank. Some investors speculate that the yield on the ten-year government bond could even fall below 1% this year.Authorities have homed in on market players, rather than economic fundamentals, as the source of the problem. They have told analysts and economists working at banks to avoid topics such as deflation and comparisons with Japan’s stagnation. As bond investors search for safe investments, regulators have told them to stop driving down yields. Some small banks have been banned outright from buying government bonds or had purchases cancelled. On January 3rd the central bank called a meeting with fund managers to tell them to reduce bond buying, according to Reuters, a news agency. Stock exchanges have also called meetings with international investors in the hope of calming nerves. A Shanghai-based portfolio manager notes that many of these moves have only increased the sense of panic.The state has not been stingy when shoring up the stockmarket. China’s central bank has offered up some 800bn yuan ($110bn, or 4% of ) in relending for stock purchases and swap facilities since September. State-owned firms, collectively known as the “national team”, probably spent over 700bn yuan in 2024 to prop up share prices. This type of state intervention may be dialled up. Rumours of a “national stabilisation fund”, or a centrally controlled investment vehicle for buying stocks, circulated last year. When local traders are not swapping jokes, they are sharing tips on how and when state capital might come pouring into the market.