China Stimulus Optimism Turns Cautious

China’s CSI300 index and the Shanghai Composite soared over 10% to their highest levels since July 2022 and December 2021, respectively, on Tuesday, 08 October. These substantial moves during early trading were driven by optimism around China’s stimulus plans to support the economy as the Chinese markets reopened following an extended break for the “golden week”  National Day Holiday. However, most gains in the stock market were erased when the chairman of China's economic planner, Zheng Shanjie, provided little detail on the specifics of the expected stimulus measures. 

The Hang Seng (Hong Kong 50) index experienced a drop of 7.6% on the return of mainland bourses after the National Development and Reform Commission (NDRC) conference offered no details about the stimulus — the lack of detailed new fiscal stimulus led to profit-taking by investors who had anticipated more aggressive measures. Mining companies Rio Tinto (RIO-L) and BHP (BHP.CHA), along with luxury stocks LVMH (MC.PA), Kering (KER.PA), Burberry (BRBY-L) and Hermes (RMS.PA) were also down, as optimism over China’s demand for copper and luxury products faded.

After the announcement from China’s economic planners, the Shanghai Composite Index was up by around 3% in early afternoon trading, while the Hang Seng in Hong Kong was more than 7% lower. However, bullish momentum remains in Asian indices, including China’s A50 (CN) index. 

China May Continue Stimulus Efforts 

Zheng Shanjie announced on Tuesday that China would issue 200 billion yuan (approximately $28 billion) for spending and investment projects by the end of the year to support regional economic growth. Moreover, a 100 billion yuan investment plan for the following year would be front-loaded from the 2025 budget by the end of the month, earlier than scheduled. However, while these measures show the government’s commitment to supporting economic growth, they were perceived as extensions of existing policies rather than new, aggressive fiscal stimulus efforts.

So far this year, the Chinese government has allocated 3.12 trillion yuan (approximately $441 billion) in special debt for project construction, leaving around 290 billion yuan by the end of September. The economic planner said, however, that the new measures, albeit lacking fiscal aggression, will focus on domestic demand and the property and capital markets.

The Chinese government has been implementing a series of measures to boost the economy, including support for the crisis-hit property sector, measures to bolster the stock market, cash handouts for the poor, and increased government spending. However, they may not be sufficient to address deeper structural issues in the economy.

On September 24, China announced a long-awaited stimulus package that saw domestic stocks rally substantially, bolstered by the People’s Bank of China (PBOC) interest rate cuts for 1-year loans and easier mortgage conditions. 

Analyst Fiscal Expectations Intact

Some analysts noted that without fiscal stimulus with "real meat and details," the rally in Chinese stocks could come under threat as investors adopt a "wait-and-see" approach to look for more concrete and substantial fiscal actions.

Interestingly, Ding Shuang, the chief economist for Greater China and North Asia at Standard Chartered Bank, noted that the announcement came from the NDRC and not the Ministry of Finance (MOF) in China. He expects the MOF to announce fiscal measures by the end of October.

In fact, some analysts suggest that while the immediate reaction on Tuesday was one of disappointment, the pro-growth policy stance of the Chinese government remains unchanged and there is potential for additional fiscal support in the future.

China GDP Critical for Outlook 

Despite the lack of an announcement of major stimulus plans in the NDRC, China remains confident in its ability to achieve its full-year economic growth target. Zheng acknowledged challenges in achieving the country’s annual growth target of 5% but argued that China would focus on strengthening macroeconomic policies to improve a contracting manufacturing sector on the heels of a missing GDP growth in June.

The Chinese economy has been dealing with a property market slump, declining prices and other challenges that have led to slower economic growth and concerns that China might miss its 5% annual growth target remain. However, this pressure may urge policymakers to introduce more effective economic reforms.

As HSBC economists Jing Liu and Erin Xin said, the NDRC “was not in a position to announce the complete stimulus package” and that “more patience” is required.

Conclusion

Initial optimism for aggressive stimulus fueled a powerful rally in Chinese indices but quickly faded as a lack of details disappointed investors. While a few announcements indicated the government's commitment to support growth, it was perceived as an extension of existing efforts, reversing earlier gains. 

Despite the lack of aggressive stimulus announcements, the Chinese government's pro-growth stance remains unchanged, potentially leaving room for fiscal interventions by the end of October. However, as the country aims to meet its 5% annual growth target despite economic headwinds, market participants might adopt a "wait-and-see" approach until further announcements from China’s MOF.