Shares in Alibaba (ticker: BABA) are facing further declines after dropping 2.4% on Monday, reflecting the stock market's lack of confidence in China's latest stimulus efforts. Despite the country's central bank cutting lending rates to support the economy and encourage consumer spending, investors are not optimistic about the world's second-largest economy.
Investors had previously expected a robust recovery in 2023 once pandemic lockdowns were lifted. However, Alibaba's decline in premarket trading on Tuesday, followed by a 0.7% fall, suggests shareholders are growing weary.
The People's Bank of China responded by lowering its seven-day reverse repo rate, a crucial rate for short-term bank liquidity, from 1.9% to 1.8%. Furthermore, they reduced the one-year medium-term lending facility rate from 2.65% to 2.5%, marking the most significant downward shift since April 2020 and the early days of the Covid-19 pandemic.
Cai Fang, a member of the PBOC's monetary policy committee, emphasized the urgency of stimulating household consumption as China's primary objective. They stated that it is crucial to employ all reasonable and legally compliant methods that would economically benefit residents. Cai Fang's statement was published on local social media late Monday, according to Bloomberg reports.
Being one of China's largest companies and a prominent e-commerce giant, Alibaba serves as an essential indicator of domestic economic trends and is highly sensitive to Chinese consumer behavior. Consequently, the decline in Alibaba stock not only reflects investor skepticism but also highlights concerns about the efficacy of China's increasingly desperate stimulus measures.
Amid numerous challenges, both the Dow Jones Industrial Average and S&P 500 are expected to decline on Tuesday. However, the slip in Alibaba stock demonstrates a distinct sense of pessimism among investors regarding the effectiveness of China's current stimulus efforts.
China's Economic Recovery Faces Challenges in 2023
China's economy experienced a setback in 2022 due to the strict zero-Covid lockdown measures imposed by the government, which stifled the country's recovery from the pandemic. Although hopes were high for a rebound in 2023, it has yet to materialize.
According to Julian Evans-Pritchard, the head of China economics at research group Capital Economics, monetary stimulus alone will not be sufficient to support growth in the current environment. In a note on Tuesday, he stated that "putting a floor beneath growth" requires additional measures.
Recent data reflecting underwhelming retail sales and industrial production further suggests that China's economic slowdown is worsening. Moreover, the distressed property sector crisis raises concerns about potential spillover effects, amplifying the overall gloomy outlook.
Evans-Pritchard also mentioned that the People's Bank of China (PBOC) typically uses changes in policy rates as a signaling tool, with other tools like adjustments to reserve requirements and bank loan quotas playing a more significant role. The recent rate cut indicates that these additional tools will be deployed in line with the PBOC's commitment to further monetary easing.
However, the market's response to the rate cut has been disappointing thus far. While Evans-Pritchard acknowledged that it signals more action from the PBOC, investors are currently looking for opportunities amidst the selloff of Chinese companies like Alibaba.
In conclusion, China's economic recovery faces challenges in 2023. Monetary stimulus alone is insufficient, and additional measures are needed to support growth. The current slowdown is concerning, with retail sales and industrial production data reflecting disappointing performance. The distressed property sector crisis adds to the overall negative sentiment. Although the rate cut by the PBOC suggests further monetary easing, investors remain cautious as they wait for signs of a turnaround.