preprints.org > business, economics and management > economics > doi: 10.20944/preprints202410.0715.v1

Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Version 1 : Received: 9 October 2024 / Approved: 9 October 2024 / Online: 10 October 2024 (10:53:24 CEST)

Thanks to the Chinese government's strong monetary stimulus initiative, the Chinese stock market has seen a recent surge. A similar scenario in history reminds us that such a surge carries significant potential risks and undermines economic sustainability. This study examines the economic stimulus by the Chinese government during 2008 and 2015 utilizing monetary and real estate policy to stimulate stock market expansion, and identifies a pattern of path dependency in the government's approach to economic challenges. In the context of the fiscal pressures of 2024, the government has again employed an extraordinary level of intervention to catalyze a significant uptick in the stock market. While this has led to a temporary increase in stock market indices, it poses substantial risks. The potential for a stock market bubble, detached from fundamental values, could precipitate a subsequent market collapse. Additionally, the government's market stimulus may be aimed at providing financial support to underperforming state-owned enterprises, which in the long-run will damage China's economic sustainability. There is also a concern that the measures to stimulate the stock market could interlink the bond market and banking sector with the equity, potentially inciting broader systemic risks. Furthermore, the housing market crisis and investors' skepticism towards the extent of China's marketization reforms will also intensify. Overall, we believe that the current round of stock market stimulus is not sustainable and leaves the door open for future risks.

economic stimulus; stock market; monetary policy; systemic risk

Business, Economics and Management, Economics

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