75% Crash: China Is Doing Much Worse Than They Feared | India-China | China Stock Market

Happy Monday, everybody. Welcome to another episode and a new week of China Update, where we discuss leading political, economic, and geostrategic analysis on the world's number two economy. My name is Tony. We have a big episode today, a lot to cover. Let's jump in. And first up, China's factory activity remained in contraction in August, a deeply disappointing result for policymakers showing, despite historic stimulus and reduced trade tensions with the US, the persistent weakness in the world's second largest economy. The official Manufacturing Purchasing Managers Index, PMI, registered 49.4. Little changed from July's 49.3 reading and below the 50 threshold that separates expansion from contraction. This is according to the National Bureau of Statistics, which reported this official data on Sunday, yesterday. So we do take it with a grain of salt, but the fact that it is a poor result in of itself is quite telling. The prolonged downturn in factory activity is weighing heavily on growth. Economic momentum weakened sharply in July, even after US President Donald Trump extended a pause on higher tariffs for Chinese goods until early November. While the easing trade tensions offered some relief, Beijing's domestic crackdown on price wars and overcapacity has constrained production, limiting the benefits of the truce. China's August PMIs show the economy hasn't shaken off July's weakness, said Bloomberg economists Chang Shu and David Xu. Construction contracted at the fastest pace since the pandemic, and the housing downturn piled on more pressure. Indeed, the property sector continues to be a major drag. Sales by the country's top 100 developers fell 17.6% year-on-year in August to US$29 billion, following a 24% plunge in July, according to China Real Estate Information Corp., which also published these numbers on Sunday. Home sales have now declined for six straight months, prolonging a slump that has stretched over four years. Beijing and Shanghai both eased home-buying rules last month, but analysts said the measures were only quote, "...incrementally positive," end quote, to quote one analyst. Goldman Sachs, in a note published over the weekend, estimates that housing demand in Chinese cities could remain 75% below its 2017 peak for years. For those who ask, when is China's collapse going to happen, in terms of their massive property market, it already has. External pressures also loom large. Trump has threatened 200% tariffs if China fails to deliver critical rare earth minerals, while Mexico is reportedly preparing to raise duties on Chinese imports as part of its 2026 budget proposal. Although shipments in other markets have offset declining US orders this year, tougher scrutiny of rerouted Chinese exports could test that resilience. Zhang Zhewei, chief economist at Pinpoint Asset Management, said in a note today, quote, "...the macro outlook for the rest of the year largely depends on how long exports can stay strong and whether fiscal policy will become more supportive in the fourth quarter." End quote. With factory output stuck in contraction and the property market in freefall, pressure is mounting on Beijing to step up stimulus to shore up growth in the months ahead. Next up, General Secretary Xi Jinping and Indian Prime Minister Modi sought to reassure one another that they are partners, not rivals, during a carefully choreographed meeting on the sidelines of the Shanghai Cooperation Organization SCO summit in the northern port city of Tianjin yesterday. The encounter marks the latest step in an ongoing effort by the world's two most populous nations to stabilize a fraught relationship, even as both remain wary of each other's ambitions. Quote, "...China and India are cooperation partners, not rivals." End quote. Xi was quoted as saying by state-run Xinhua in a piece yesterday. He emphasized that the two countries should regard each other as, quote, "...development opportunities rather than threats." End quote. Modi, making his first visit to China in seven years, echoed that sentiment, stressing the stability of their relationship affects the lives of 2.8 billion people. The meeting highlighted tangible steps already underway, the resumption of direct flights, agreements to ease border tensions, and efforts to normalize trade. Quote, "...after the disengagement at the border, an atmosphere of peace and stability is now in place." End quote. Modi said. Relations between the two nuclear-armed neighbors collapsed in 2020 after a deadly Himalayan border clash, which we covered at the Taiwan-China update. Although the talks since then gradually reduced tensions, it was only after Modi's meeting with Xi last year in Kazan that the clearer thaw began to take hold. India's Ministry of External Affairs said Modi stressed that both countries, quote, "...pursue strategic autonomy." End quote. And should not allow their relations to be defined, quote, "...through a third country lens." End quote. Yet persistent frictions remain. India continues to run a large trade deficit with China, a sore point conspicuous in official readouts. Both leaders, quote, "...underline the need to expand bilateral trade and investment ties and reduce the trade deficit." End quote. New Delhi said. The backdrop to this reset is the increasingly hostile stance of U.S. President Donald Trump's administration toward India. Trump's imposition of tariffs of up to 50 percent on Indian exports may have alienated New Delhi and, some analysts argue, reversed years of deepening strategic ties between Washington and Modi's government. Xi appears determined to exploit that rift, using the SCO stage to showcase China as a more dependable partner for developing nations. While the optics are positive, Indian analysts remain cautious, however. Quote, "...I wouldn't call this a repenchment in the strict sense of the word, but we are certainly seeing tensions being reduced and a move towards stability in the relationship." End quote. Said Neerupa Morao, a former Indian foreign secretary and ambassador to Beijing. Beijing's strong support for Pakistan, its expanding influence in South Asia, and India's continuing border concerns all weigh heavily on New Delhi's calculus. For now, however, both sides appear to see value in dialing down hostility. For China, the moment offers an opportunity to underline its regional leadership amid global trade disruptions. For India, it represents a pragmatic step to secure breathing room at home and abroad. The India-China relationship has long been described as a delicate dance between the dragon and the elephant. After years of bruising clashes and cold silence, both sides seem intent on moving in step once more, even if only to avoid stepping on each other's toes. Next up, we have one more big development to cover. But just quickly, if you want to be on top of the most up-to-date analysis on China, specifically its regional politics and the emerging US-China Cold War, consider subscribing to China Update. Hit the bell notification icon and you will be. If you're getting some value from today's episode, don't forget to hit the like button. And if you would like to help keep China Update financially sustainable, I rely primarily on your support, audience support to keep going so that the channel is not reliant on corporate sponsorship. Patreon and Buy Me A Coffee links are in the description below. This is a massive help too. Thank you so much, everyone, for the amazing ongoing support. And finally for today, we return to the Chinese economy. Chinese equities have staged an impressive rebound this year, and this is despite almost daily bad news on the front. What is going on? Well, it appears that this is being fueled almost entirely by domestic investors who are seeking returns in a financial landscape short on alternatives. While foreign capital remains hesitant, the enthusiasm of Chinese households and institutions has propelled mainland markets into global outperformance. The CSI 300, China's main benchmark of large shares, was flat in the first half of 2025. Since late June, however, it has surged to deliver a 14.3% gain year to date, beating major US, European and Japanese indices in local currency terms. The rally is striking given the broader economic backdrop of persistent deflation and sluggish growth. Analysts point to ample liquidity and narrowing investment choices as the main forces behind the surge. Quote, for households and institutions in China, they don't have too much choice. End quote, said Shujian Chen, China economist at Jefferies. With government bond yields near record lows and deposit rates falling, not to mention a property market which has been in the toilet for almost half a decade, equities have become one of the few appealing destinations for excess cash, especially considering it's coming off a low base. We also note that due to very strict capital controls, folks in China can't get their money out of China. They have to invest in the country. Loose monetary policy has also redirected funds. Quote, initially we saw liquidity flow into the bond market, but with the 10-year yield dropping to unattractive levels, investors turned to stocks. End quote, explained evidence Bush True. The collapse of the once preferred real estate market has further funneled household wealth into equities. Margin financing underscores this appetite. Borrowed money used for stock purchases has risen 19% in two months to US$308 billion, the highest level since 2015, which just so happens to be when China's stock market crashed. Unlike that period, however, analysts argue structural changes and more measured government policies make the current rally less bubble prone. And like I said, this is also coming off a very low base. Beijing has not been a bystander during all this. Coordinated share purchases of state-owned funds earlier this year helped establish a floor under asset prices, while new rules encouraged insurers to increase equity exposure. Together, these measures boosted confidence and underpinned the rally's momentum. Despite the domestic frenzy, international investors have largely stayed on the sidelines, however. Derivative markets reflect this caution. While the Hang Seng China Enterprises Index has rebounded 23% since April, implied volatility remains elevated relative to actual market swings, making options costly and discouraging bullish bets. For now, Chinese equities are enjoying one of their best stretches in years, with August ranking among the strongest months globally. It concerns Linga about how long liquidity-driven gains can endure without a more robust economic recovery. It's very different from the bubble of a decade ago, said Kinga Lau, chief China equity strategist at Goldman Sachs. We are in a more moderate rally now. Still, investors at home and abroad know that sustainability hinges less on liquidity and more on whether Beijing's efforts to reignite growth and tackle stubborn deflation ultimately succeed. A years-long effort which still has not seen success. I hope to see you for another episode, tomorrow.