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China's Stocks Lose Steam as Enthusiasm for Major Stimulus Wanes. What's Next?

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Analysts Notebook wrote a column · Oct 8, 2024 18:04
Tuesday marked the first trading day in mainland China after the "National Day Golden Week". Disappointingly, during the press conference held by officials from the National Development and Reform Commission, no significant stimulus plan was announced as anticipated by the market. This led to some skepticism among investors regarding Beijing's policy determination, causing the main index of the A-share market, the CSI 300, to soar by over 10% at the opening, only to narrow down to 4.6% by the end of the day. Meanwhile, the Hang Seng Index, which had been rising for several days, opened lower and continued to decline, with the deepest drop reaching 10%.
The volatile market conditions have caught many investors off guard, leaving them eager to learn how to deal with the pullback risks of Chinese assets and what to expect in the market following this round of fluctuations.
Further Economic Actions Laid Out by China's State Planner, But No Major Stimulus Introduced
Prior to the holidays, the People's Bank of China significantly eased its monetary policy, implementing cuts in the reserve requirement ratio and interest rates, as well as reducing the interest rates on existing housing loans to stimulate consumption. Subsequently, a meeting of the Central Political Bureau to discuss the economic situation was convened ahead of schedule. It was explicitly stated that there would be an increase in the intensity of counter-cyclical adjustments in fiscal and monetary policies, ensuring the introduction of necessary financial and market support measures. A series of stimulus policies beyond expectations not only alleviated the previously pessimistic sentiment among investors about the outlook of the Chinese economy but also greatly boosted confidence in Chinese assets in the market.
Consequently, global investors have turned their attention to the speech by the National Development and Reform Commission on Tuesday, anticipating more concrete commitments to major stimulus. But, the briefing on Tuesday did not offer new stimulus measures. Officials, including Zheng Shanjie, chairman of the National Development and Reform Commission, mentioned that they would accelerate the use of local government special bond issuances, explore expanding the scope of special bonds support, and advance the issuance of next year's central budget investment plan ahead of schedule within the year. However, the strength of these policies falls short of the significant stimulus measures investors had anticipated before. While Zheng expressed confidence in achieving the annual economic and social development goals, he also acknowledged the increasingly complex domestic and international environment facing China.
Goldman Sachs analysts believe that China is likely to implement new fiscal stimulus measures, despite the recent policy press conference missing market expectations. They point out that significant fiscal stimulus efforts require collaboration across various government ministries and primarily rely on fiscal resources rather than social capital. It is anticipated that the Chinese officials will approve an additional CNY1 trillion to CNY 2 trillion in ultra-long-term central government special bond quotas by the end of this year, utilize untapped local government bond quotas for debt swaps, and maintain a stance of fiscal easing in 2025 and potentially beyond.
Below are the key policy milestones that Goldman Sachs has identified as potentially impacting the current China Rally, including high-frequency data during the National Day holiday and US inflation data.
China's Stocks Lose Steam as Enthusiasm for Major Stimulus Wanes. What's Next?
How to Trade Chinese Assets in a Volatile Market?
Disregarding the market fluctuations on Tuesday, indeed, the $CSI 300 Index (000300.SH)$ and the $Hang Seng Index (800000.HK)$ have gained about 28% and 36% respectively from their lows in September, in just about two weeks. Moreover, the Shanghai and Shenzhen 300 Index has seen a continuous increase for nine consecutive trading days, driven by optimistic sentiments based on policy policy stimulus. As some analysts have pointed out, the steep and sharp rise driven by violent short squeezes and capital inflow may not be sustainable for an extended period. As the valuation correction of Chinese assets reaches a certain level, the speed and intensity of the restoration may start to marginally diminish compared to the earlier phase. Additionally, profit-taking at high levels may pose further challenges to the market.
The next focal points may concentrate on the following aspects:
1. The anticipation of policy stimuli is the primary catalyst for this round of market performance. It is crucial to monitor whether the policies are gradually implemented as expected and if the policy details are comprehensive enough.
2. Monitoring upcoming economic data in China is essential to validate the effectiveness of the policies.
3. The United States is set to release significant inflation data this week, and the impact of U.S. economic data and monetary policy expectations on global fund allocation cannot be overlooked.
From a trading perspective, investors can consider the following:
1. In the short term, Chinese assets face the risk of a pullback after the previous rapid surge. Investors need to be mindful of the trading pace and adopt more flexible trading strategies to seize opportunities to buy low and sell high timely. For investors with significant long positions, amidst heightened market volatility, products like $Direxion Daily FTSE China Bear 3X Shares ETF (YANG.US)$ can be utilized for hedging.
2. Looking ahead, capitals are expected to return to individual stock fundamentals rather than a sustained overall uptrend, leading to inevitable differentiation in trends. With the Hong Kong stock market transitioning from a phase of general rise to sector rotation during the National Day holiday trading period, this shift may provide insights into the onshore market trend. The focus should be on seizing alpha opportunities, exploring opportunities where long-term funds remain underweighted, valuations have a safety margin, and earnings recovery is relatively certain.
Source: Bloomberg, CNBC
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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