INSIGHT: China stimulus measures take center stage as markets re-open

SINGAPORE (ICIS)–Volatility marked the first few days of re-opening of China’s financial and commodities markets as investors’ initial hopes of more economic measures were crushed.

• Implementation plans for pre-holiday measures unclear
• Infrastructure-focused sovereign bonds to drive growth further
• China GDP growth to slow to 4.3% in 2025 – World Bank

The highly anticipated return of Chinese market players after a week-long absence sparked a surge in the equities markets, with the closely watched CSI 300 – which tracks shares of the top 300 companies trading in Shanghai and Shenzhen, had surged by 11% on 8 October.

“Expectations were high after the monetary announcements made [in] the week of 24 September and there were even news reports of up to a [yuan] CNY10 trillion ($1.4 trillion) stimulus,” hedge fund portfolio manager Rikki Malik said in a note issued on Wednesday for investment research and analysis firm Smartkarma.

On Wednesday, the CSI300 index fell by 7%, reflecting concerns over the lack of concrete new stimulus measures from Beijing to sustain the rally.

Other Asian equity indices tracked the weakness in Chinese bourses amid risk aversion also stoked by geopolitical jitters in the Middle East

At 08:53 GMT, Hong Kong’s Hang Seng Index was down by around 1.4% at 20,637.24, continuing from its sharpest single-day decline in 16 years in the previous session.

Chemicals giant Sinopec was down by 3.61% and state energy firm PetroChina fell by 3.14% in Hong Kong.

Elsewhere in Asia, South Korea’s KOSPI Composite ended 0.61% lower to 2,594.36 while Japan’s key Nikkei 225 closed up by 0.87% at 39,277.96

China’s petrochemical futures tumbled, with polyvinyl chloride (PVC), purified terephthalic acid (PTA) and paraxylene (PX) futures leading the slump.

Market sentiment was also weighed down by crude oil’s plunge overnight, in which both Brent and WTI benchmarks shed more than 4%.

POST-HOLIDAY POLICY BRIEFING UNDERWHELMS
The National Development and Reform Commission (NDRC) – China’s top economic planner – held a briefing on 8 October in which chairman Zheng Shanjie said that China was “fully confident” of achieving economic targets for 2024.

But his failure to detail sufficiently big or new measures rekindled market doubts about Beijing’s commitment to ensuring the economy can climb out of its most serious slump since the global pandemic and achieve a 5% growth.

Market players were initially expecting the government to adopt further fiscal measures to arrest the slowdown of the world’s second-biggest economy.

Instead, the NDRC emphasized confidence in achieving the “around 5%” growth target for this year based on policy measures announced in late September.

Toward this end, issuance of long-term sovereign and local government bonds will be accelerated to fund infrastructure projects well into next year.

Additionally, the NDRC announced upcoming investments in key strategic areas totaling yuan (CNY) 100 billion, on top of plans to expedite CNY100 billion in central government investment originally planned for 2025.

NO MAJOR NEAR-TERM IMPACT FROM STIMULUS MEASURES
During the seven-day China holiday in the first week of October, domestic tourist trips grew 5.9% year on year, with revenues up by 6.3% over the same period. But the per trip spend was near flat at 0.4%, according to data from the Ministry of Culture and Tourism.

Week-long holidays in the country, including the Spring Festival/Lunar New Year and Labor Day celebrations in February and May, respectively, typically result in spikes in domestic tourism spending.

In October, domestic tourism activities remained positive this year while there were also reports of stronger outbound and inbound travel during the period.

The two earlier major holidays in China – the Spring Festival and Labour Day holidays – had recorded stronger improvements across number of trips, total spend and spend per trip, according to Singapore-based UOB Global Economics & Markets Research in a note on Wednesday.

“Although the recovery in outbound travel may dilute the demand for domestic tourism, the moderation in spend per trip continue to indicate more cautious spending amongst consumers,” it said.

“The initial spillover from recent PBOC [People’s Bank of China]-led stimulus to consumer spending including the rollout of local government vouchers and promotions to boost consumption had been lacking in the National Day holiday statistics,” UOB said.

“This further affirms the need for stronger fiscal measures that target consumption and support to the labor market particularly with youth unemployment rate rising to 18.8% in Aug which continues to hamper the recovery in consumer confidence.”

Ahead of the National Day holidays, China’s central bank had announced stimulus measures estimated to be worth at least CNY3 trillion, which is equivalent to 2.3% of its GDP.

These measures include a 50-basis point cut to banks’ reserve requirement ratio (RRR), injecting CNY1 trillion into the financial system.

Further measures include a CNY1 trillion capital injection to state-owned banks, a reduction in interest rates on existing mortgages to release CNY150 billion in funds, and CNY800 billion allocated to swap and re-lending facilities for stock purchases.

“Investors were also disappointed that some of the 2025 budget would be pulled forward to this year, implying no new money, but… it is easier to issue special bonds which are off budget, rather than going through the rigmarole of increasing this year’s budget deficit,” said SmartKarma’s Malik.

Markets will now be closely watching for further fiscal stimulus to support consumption and investment.

“In addition, given the onset of winter, construction projects need to be started quickly. We fully expect there to be further issuance of ultra-long special bonds,” Malik added.

Investors watching for signs of China’s next policy moves now have three key dates circled on their calendars.

In late October, the Standing Committee of the National People’s Congress (NPC) is scheduled to meet in late October. Meanwhile, China’s Q3 GDP is slated for release on 18 October; while country’s Politburo is due to meet early December, leading to the annual Central Economic Work Conference (CEWC).

The CEWC is a pivotal annual meeting in China during which country’s economic agenda is set for the upcoming year. The conference typically takes place over two to three days in December.

CHINA 2025 GROWTH TO SLOW DESPITE STIMULUS – WB
Economic growth in China is projected to slow to 4.3% next year from 4.8% in 2024 despite economic stimulus measures that China introduced in September, the World Bank warned in a report on 7 October.

This is due in part to low consumer and investor confidence, property market weakness, an ageing population and global tensions, the multilateral institution said.

“Recently signalled fiscal support may lift short-term growth but longer-term growth will depend on deeper structural reforms,” the World Bank said.

“China has led growth in the region for more than three decades, but its relative growth is likely to slow down in future,” it added.

Insight article by Nurluqman Suratman

With contributions from Jonathan Yee

($1 = CNY7.07)