During an interview, analysts expressed concerns about the turbulent state of Chinese stocks, indicating that profit-taking could persist in the market. China’s Finance Minister, Lan Fo’an, announced on October 12 that the government plans to issue more bonds to stimulate the housing market, support banks, and assist local governments. However, he did not provide the level of detail that investors had hoped for, leaving many eager for more clarity on forthcoming stimulus measures.
Investors had high expectations for a robust expansionary spending plan from Lan, but what was revealed fell short. He reassured that “our counter-cyclical adjustment measures will exceed what I have mentioned,” adding that discussions about further measures are underway. He acknowledged that the central government has significant room to expand its fiscal deficit and debt levels.
Lan mentioned that the government intends to issue bonds to allow local governments to purchase idle land from developers, as well as unsold housing units. Special purpose bonds will also be issued to bolster major banks’ capital, enabling them to lend more effectively, along with increased support for students and low-income families. He highlighted that relieving local governments’ debt burdens is one of the key focuses of the new spending initiatives, particularly since many localities rely heavily on real estate and related industries for fiscal revenue.
Economists at Moody’s noted that central government support for local entities could enhance spending and spur economic growth. However, without specific figures on fiscal stimulus measures, investors might wait until the scale of financial support is clear before making their moves. Senior officials have held a series of press conferences, indicating a “fundamental shift” in the Beijing authorities’ economic perspective. They acknowledged that although this process takes time, a change in confidence might already be emerging.
Experts estimate that China could require around 10 trillion yuan in spending over the next two years to restore economic prosperity, with a significant portion needed to support households and boost domestic demand.
While Lan has committed to providing more support for the housing market and hinted at expanding debt issuance to invigorate the economy, the lack of specific funding amounts and new consumer incentives has disappointed traders.
Investor sentiment is increasingly worried that Chinese stocks may face disappointing sell pressure. A Bloomberg survey conducted ahead of the press conference indicated that respondents expected authorities to potentially increase fiscal spending by up to 2 trillion yuan, encompassing subsidies, consumption vouchers, and financial support for families with children.
Investors were hoping for substantial fiscal stimulus measures to support a bullish trend in the stock market, but patience is wearing thin. Last week, the CSI 300 index fell by 3.3%, the largest weekly decline since July, although it remains up by 21% since the authorities announced stimulatory monetary policies on September 23. With increasing market volatility, the risk of a downturn in the bullish trend of Chinese stocks has amplified, possibly leading to greater selling pressure.
A director at Magellan Investments stated that “further fiscal stimulus measures are still under discussion,” indicating that the market might face additional profit-taking pressures in the meantime.
On Sunday, China released its Consumer Price Index (CPI) for September, showing a 0.4% year-over-year increase, which was below market expectations. The Producer Price Index (PPI), on the other hand, fell by 2.8%—a drop larger than economists’ forecasts—and marks the largest monthly decrease in six months, continuing a streak of declines for the 24th consecutive month. This weak inflation raises concerns for investors and underscores the necessity for the government to implement further policies to support the economy.
The recent surge in Chinese stocks has prompted firms like Goldman Sachs and BlackRock to consider upgrading their ratings on Chinese equities. However, Invesco and Morgan Stanley warn that the market has risen too quickly and too much.
Investors are gearing up for significant stimulus policy announcements in the coming weeks, especially from the National People’s Congress (NPC), to gauge new measures. The Ministry of Finance cannot announce specific bond issuance amounts until the NPC makes a final decision, with upcoming meetings anticipated in the next few weeks. Last October, the NPC approved new bond issuances and an increase in the deficit ratio.
Should Chinese authorities broaden their debt issuance, it may exert pressure on the bonds market and motivate a shift toward higher-risk investments. However, while an increase in bond supply could drain liquidity from the market, it also poses a dual threat to the stock market.
