China's economy is in trouble and a stock-market rescue won't change the 'uber bearish narrative'

• China's economy is ailing and propping up the stock market won't bring investors back, experts told Business Insider.
• Given the real estate downturn and mounting debt, global investors say they're "uber bearish" on China.

China's economic turmoil and the failure of the post-pandemic rebound have been the emerging macroeconomic stories of the last year.

An ailing real estate market, staggering debt, historic youth unemployment, and an exodus of foreign investment are at the top of a long list of structural challenges, many of which have been years in the making.

Among the attempts to right the ship, authorities now have their eyes set on China's tumbling stock market.

Bloomberg reported this week that Beijing is weighing a $278 billion rescue package to stabilize markets and restore investors' confidence following massive outflows of foreign capital last year. The CSI 300, China's benchmark index, touched a five-year low in the days before Bloomberg reported on Beijing's plan.

Since peaking in 2021, Chinese and Hong Kong stocks have shed roughly $6 trillion in value. The region's key indexes have severely underperformed those of the US, Japan, and other large economies last year.

Still, China-watchers remain skeptical whether the government's liquidity injection will be worthwhile, and if targeting the stock market will provide much benefit to the underlying economy.

"You have an uber-bearish narrative around China that is proving very difficult to dislodge," Nicholas Spiro, a partner at London-based consultancy Lauressa Advisory, told Business Insider. "China is emphatically out of favor with global investors."

And while soothing jittery domestic stock investors may be important to officials in Beijing, the economic realities will be essentially unchanged by any intervention into the country's stock market.

Sentiment is so bleak, Spiro said, that investors and authorities alike don't have a clear vision of what needs to happen next.

"China is clearly concerned the markets have been doing terribly," said Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana. "But the terrible stock market is not isolated by any means."

Roberts, who is the author of the book "The Myth of Chinese Capitalism," told Business Insider that boosting stocks won't solve the other issues plaguing the economy. He said the property market, for one, poses a more severe risk, given that most people's wealth and a large portion of the country's GDP is tied to real estate.

Sinking property values have weakened confidence and compelled people to save more money, which reduces the available capital for investments.

"The amount of wealth held in the stock market is pretty insignificant compared to what's in the property market," Roberts said. "The long, continued decline in stocks is in part an embarrassment for the government, but it's unclear the real value of a rescue package."

In 2015, Beijing attempted a similar market intervention after a key segment of the Shanghai Stock Exchange lost a third of its value in a matter of weeks. The impact of that move, too, proved short-lived, which may foreshadow the effectiveness of any new package.

Plus, Roberts notes that China's economic landscape in 2015 was far more stable and positive than it is today. Eight years ago, China was actively investing in its real estate sector, whereas authorities are now attempting to downsize it and reduce leverage.

Consumers in turn are stuck in "multiple crises of confidence" across debt, property, and employment, Roberts said.

In a note published Wednesday, economists at Ned Davis Research said leading indicators point to modest growth in China over the coming months, yet equities still look weak. It's difficult to adopt an upbeat, long-term view on China, NDR said, given the reality of its aging and shrinking population.

As the chart below shows, Chinese equities have performed best when the economic data shows acceleration, which isn't the case now.

Meanwhile, in a separate initiative, the People's Bank of China announced its largest "economic first aid package" in two years, effectively in the form of a $140 billion liquidity injection for the banking system.

In any case, to Spiro, a lack of clarity on policy makes for a bleak outlook politically, financially, and socially.

"What is very concerning is that there are deep-seated structural problems at work here," Spiro said. "That's really what is concerning investors, and that's codified by a history of botched rescues. No one knows how China will rebalance its economy, or whether in fact it's able to do this."