What China needs to do to restore confidence in its economy

According to Bloomberg estimates, the recent sell-off in Chinese and Hong Kong equities has wiped out almost $5 trillion in value, since the peak in 2021. According to Chinese state media, Wu Qing, a former chairman of the Shanghai Stock Exchange, will replace Yi Huiman as Chairman and Communist Party chief of the China Securities Regulatory Commission.

Anthony Sassine, Senior Investment Strategist at KraneShares, and Eswar Prasad, Senior Professor of Trade Policy at Cornell University, joins Yahoo Finance to discuss the state of China's economy and what the Chinese government will need to do to alleviate their current situation.

Sassine starts off by explaining current issues with the Chinese economy: "The policy has been supportive for the economy, especially from the fiscal side over the past two years. We saw that from infrastructure perspective and also manufacturing. And that helped a lot keeping the growth at 5%. But that hasn't been effective in actually bringing consumers back, right? So consumer sentiment continued to be depressed in China. Especially after two years of Covid and regulations, which show some of the internet companies kind of, being under the microscope, and not hiring as much as they used to. The consumer is still not consuming as they should."

Prasad explains what it will take to pick things up: "Right now, we are seeing deflation becoming entrenched. We see that the stock market is unraveling. The property market is not doing terribly well. Growth is slow, employment is weak. The biggest problem, though, is the lack of private sector confidence. Households are very reluctant to consume. Private businesses are very reluctant to invest. That's going through a combination of things to turn matters around. It's going to require some macroeconomic stimulus, especially fiscal stimulus that more directly supports consumers. It's also going to require some measures to restore confidence in the private sector. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

AKIKO FUJITA: Well, Chinese blue chip stocks have been under pressure as investors lose confidence in the government's ability to respond to an economic downturn. Bloomberg estimates a sell-off has wiped out roughly $5 trillion in value from Hong Kong and Chinese equities since the peak of 2021.

Overnight, China replaced its top securities regulator, a surprise move that may signal more aggressive measures by Beijing to stem the capital outflows. To discuss the implications for investors, let's bring in Eswar Prasad, Cornell University Professor and the author of "The Future of Money." We also have Anthony Sassine, Senior Investment Strategist at KraneShares.

Anthony, I'm going to start with you. Obviously, with KraneShares, you've got KWEB there certainly been affected by the declines that we've seen in overall Chinese equities. As you look to see how the policy is shaping out to create a floor, if you will, on this sell-off, how do you look at the portfolio mix? And what's ahead?

ANTHONY SASSINE: Yeah, no, thank you. Never a dull day with China. So the policy has been supportive for the economy, especially from the fiscal side over the past two years. We're seeing-- we saw that from infrastructure perspective and also manufacturing. And that helped a lot keeping the growth at 5%.

But that hasn't been effective in actually bringing consumers back. So consumer sentiment continue to be depressed in China, especially after two years of COVID and regulations, which show-- so some of the internet companies kind of being under the microscope and then not hiring as much as they used to. So the consumer is still not consuming as they should. They're just buying low-priced tickets versus high-priced tickets. And you can see that in the lower revenue.

But these companies, KWEB companies have done a great job over the past year of cutting the fat, of cutting costs. You look at the EBITDA growth has been much better. Net income growth has been much better.

Alibaba has a specific kind of situation here, where they're going through a restructuring. Investors still not sure of which direction. When they're going to IPO, how many different units it's going to be, who's the CEO. So these are all questions.

But if you look at Pinduoduo, Kweichow, Doyen-- these companies are doing really well growing. Pinduoduo did 94% revenue growth last. So basically, within that space, some companies are doing better. The overall picture is the consumer is not coming back as fast as we want it to.

And that's because we want to see government focus on more demand side stimulus. We want them to strengthen the safety net, provide consumers with paychecks to consume, subsidize hiring. Do these kind of things that actually transfer economic gains from manufacturing and infrastructure to actual consumer.

RACHELLE AKUFFO: So Eswar, I want to bring you in here because as you look at some of the indicators that are showing you what's happening with the underlying economy and financial markets and the heavy lifting that the Chinese government is going to have to do, how much confidence do you think this is inspiring right now?

ESWAR PRASAD: This is a pretty perilous time for the Chinese economy, Rachelle. Because right now, we are seeing deflation becoming entrenched. We see that the stock market is unraveling. The property market is not doing terribly well. Growth is slow. Employment is weak.

The biggest problem, though, is the lack of private sector confidence. Households are very reluctant to consume. Private businesses are very reluctant to invest. And that's going to require a combination of things to turn matters around.

It's going to require some macroeconomic stimulus, especially fiscal stimulus that more directly supports consumers. It's also going to require some measures to restore confidence of the private sector. One of the things that has really hurt confidence over the last couple of years is the management of the COVID situation, but also the fact that the government has taken a heavy hand to private sector firms in the tech sector, Alibaba being one example, but also firms in the health sector, the education sector, and so on.

And during my last visit to China, there was a clear distinction between what I heard in Beijing from officials, the sense that they were still on the side of private enterprises, and what I heard in Shanghai from many entrepreneurs that they felt that something fundamental had changed, that Beijing was perhaps not hostile to the private sector but was not going to support it in the way it had in the past.

And that's going to mean that the Chinese government has some pretty heavy lifting in order to restore confidence, which is going to be essential in order to generate better productivity and employment growth, for which it really needs the private sector.