The strategy of reviving China's stock market with the help of its own central bank PBoC has been quite successful. Onshore and offshore stock markets have been strong. The shock that the market has received last week reminds us of the bubble burst of the Great Depression in 2015. Seeing this, it seems that understanding the correct valuation of the stock market and making profits from it is still a distant dream. The fundamentals of the economy have weakened considerably in the years since the recession.

Looking at the current market situation, market experts believe that China will once again resort to fiscal measures and other supportive policies to deal with the situation. This time its fiscal package will be quite balanced and its scale will be uncertain. Due to this, investors can enjoy the boom in the market for some time, but a deep assessment will be needed to understand its serious internal impact.

On doing this assessment, we see three types of scenarios for the coming days. In view of this, investors need to be prepared for the weakest scenario after enjoying the initial period of the carnival. China's focus can be on a total of four things in the stimulus or package that China can give to increase its market in the next few months. In this too, initially it will focus on three sectors. First, it will increase fiscal transfers to local governments to deal with the shock. Secondly, to boost investment demand, China can speed up the construction of its mega cross-region projects. Third, China can consider increasing spending on social security schemes to help the poor financially. In the fourth and final measure, it can provide funds to those stalled residential projects which have already been booked but their work is stuck due to lack of capital. However, the size and pace of this entire package can be very uncertain. Nevertheless, the size of the stimulus can be up to 3% of China's GDP.

Even good moves come with risks
Individual investors, especially those who have not yet experienced a major shock like the Great Depression, are eager to open accounts to take advantage of the market rally following government measures without delving deeper into the situation. Given the current market momentum and the sentiments emerging on Chinese social media, the risk of a repeat of the 2015 Great Depression seems to be increasing in the coming weeks.

Although the stock markets have not yet reached there, the fundamentals of the Chinese economy appear to be weakening amid three years of the coronavirus pandemic, nearly four years of the housing crisis, a second wave of government debt and economic stress shocks, the bursting of the energy sector investment bubble and still rising geopolitical tensions.

In such a situation, we can maintain our GDP growth forecast for 2025 at 4.0%. In case of heavy stock trading, the Q4 forecast could be raised to 4.4% from 4.2%. In this case, the 2024 annual GDP forecast could be slightly raised to 4.6% from 4.5%.

The good, the bad and the baseline
In the best case scenario, officials could keep a close eye on the emerging market bubble and take timely measures to deal with the stock market frenzy. This includes carefully managing the size and speed of fiscal stimulus. In the worst case scenario, the stock market volatility could be followed by a recession similar to the 2015 recession.

To deal with such a decline, China could ask its central bank PBoC to print currency, but this could reduce liquidity in the market due to excessive stock purchases.

The bubble could burst
This could lead to uncontrolled capital flight and the Chinese currency RMB could come under pressure of depreciation. This could limit the PBoC's ability to buy stocks. Under the baseline scenario, we could see a small bubble in the market and a bursting of the bubble.

In that case, Beijing could introduce fiscal measures to stabilize demand and keep the basic operations of local governments running. These measures could provide some short-term support to the market but may fail to address the serious structural problems and deteriorating condition of the property sector.