A shareholder at a stock exchange hall in Hangzhou, capital of east China's Zhejiang Province, on September 24, 2024.
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BEIJING – China's latest policy signals have a bigger impact on sentiment than resolving deeper issues such as real estate, analysts said.
The Shanghai Composite Index rose on Thursday to close at a three-month high after state media reported that Chinese President Xi Jinping led a Politburo meeting on the economy that morning.
The unexpected high-level meeting called for halting the decline in the real estate market and strengthening fiscal and monetary policy. He provided few details, while confirming the interest rate cuts announced by the central bank earlier in the week.
Markets should appreciate how Beijing recognizes the seriousness of the economic situation, and how its gradual approach has not worked so far, Ting Lu, chief China economist at Nomura Bank, said in a report on Friday.
“A 'shock and awe' strategy can aim to stimulate markets and boost confidence,” Lu said, but ultimately it is still necessary to introduce thoughtful policies to address many “deep-rooted problems.”
Growth has slowed in the world's second largest economy, affected by the real estate recession. Retail sales have risen barely 2% in recent months, and industrial profits have barely grown during the first eight months of this year. Exports are one of the few bright spots.
Policymakers in particular need to stabilize the real estate sector because it is in its fourth year of contraction, Nomura's Lu said. He estimated that the impact of the additional stimulus would not exceed 3% of China's annual GDP.
“Markets should focus more on the details of the stimulus,” Lu said. “If the stimulus program is not well designed, a hasty stimulus program, even if it seems large, can have a slow and limited impact on growth.”
The People's Bank of China this week cut key interest rates, announcing plans to lower interest rates for existing mortgage holders. The Ministry of Finance has not yet issued major policies, despite reports of such plans.
Questions about the scale
For some institutional investors, this is still not enough to move the needle on their outlook for China.
“China’s policy moves to lower interest rates have not helped improve confidence among consumers who are wary of borrowing in the first place,” Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute, said in an email.
“We will sell emerging market stocks at this stage, as we do not have much confidence in Beijing’s willingness to provide the significant stimulus required,” he said.
Christopher added: “The upcoming fiscal stimulus announcement on Thursday is welcome, but it remains to be seen whether the Chinese government is prepared to take the necessary steps to reverse the psychological damage to the sentiments of households and private businesses.”
The Chinese government has cracked down on real estate developers, after-school tutoring companies and the gaming industry in recent years. Since then, policymakers have softened their stance, but business and consumer confidence has yet to recover.
China's latest interest rate cuts follow the US Federal Reserve's shift last week to easier monetary policy. In theory, US interest rate cuts give China's central bank more room to cut already low domestic interest rates.
A September survey of more than 1,200 companies in China by the US-based China Big Book found that corporate borrowing has fallen, despite historically low costs.
“One can certainly hope for a wealth impact from stocks and real estate, but stocks will be temporary and the decline in wealth from real estate is enormous compared to any relief,” said Shehzad Qazi, chief operating officer at China Big Book, a US-based think tank. company, said in a note Thursday.
Retail sales are expected to rise slightly over the next four to six months.
Qazi also expects the recent rally in Chinese stocks to continue through the last three months of the year. But he warned that policies announced this week to attract more capital into the stock market “have not yet been enacted, and some may never be enacted at all.”
Change feelings
These warnings did not discourage investors from accumulating distressed Chinese stocks. The CSI 300 stock index rose on Friday, on pace for its best week since 2008. It could rise another 10% in the near term, Laura Wang, chief China equity strategist at Morgan Stanley, told CNBC's Street Signs Asia.
The shift in sentiment has spread globally.
“I thought what the Fed did last week would lead to monetary easing in China, and I didn't know they were going to bring out the big guns like they did,” David Tepper, the billionaire US hedge fund founder, told CNBC. Thursday. “I think there is a complete shift.”
Tepper said he bought more Chinese stocks this week.
One important takeaway from Thursday's high-level government meeting is support for capital markets, in contrast to China's more negative perception of the financial industry in recent years, said Bruce Liu, CEO of Esoterica Capital, an asset management firm.
He added: “I hope that this meeting will correct this misconception.” “For China to continue to grow in a healthy way, it really needs a well-functioning capital market.”
“I don't think they sent any different messages,” Liu said. “It's just that (they're) emphasizing that with detailed action plans. That's made a difference.”
