Patrik Schowitz

Macroscope | China’s stimulus plan will lift the economy, just not right away

Despite the gloom of a slowdown as the impact of a trade war with the US hits, the raft of policy measures Beijing is taking is boosting market optimism. The strong rally in the stock market may well signal the economic cycle is ready to turn

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Bus ushers pose for photos ahead of the opening session of the National People’s Congress meeting at the Great Hall of the People in Beijing, on March 4. The Chinese government will step up tax cuts and increase infrastructure spending to stabilise the sagging economy, Premier Li Keqiang said in his annual work report at the meeting. Photo: AP

Patrik Schowitz

Published: 10:32am, 8 Mar 2019Updated: 10:29pm, 8 Mar 2019

What a difference a few months make. In 2018, Chinese equities had their worst performance in a decade, with the Shanghai Composite Index down by 25 per cent. Last week, the Shanghai benchmark had its best weekly performance since mid-2015, which lifted the index to bull market territory. So far in 2019, Chinese equities have significantly outperformed other emerging and developed markets peers.

Sentiment has played a big role in driving the rally. Positive news in recent weeks has helped boost market optimism in China. The first sign was the notable upside surprise in China’s January credit growth data. The surge showed that policymakers are stepping up their efforts in monetary easing to counter a slowdown in the economy.

The more responsive policy action also relieved some market concerns that stimulus measures may be too little, too late. Confidence in China’s policy easing was further boosted when officials signalled a stronger emphasis on stability of growth in a recent Politburo meeting.

Another key driver of the improving sentiment has been the positive developments in the US-China trade talks. Last week, the US trade representative confirmed that the scheduled tariff increase from 10 per cent to 25 per cent on US$200 billion of Chinese goods on March 2 had been postponed.

Even more importantly, President Donald Trump has floated the possibility of a summit with President Xi Jinping soon, to conclude a trade agreement. However, the market may have neglected the possibility of tough negotiations ahead, as structural issues, intellectual property rights and forced technology transfer, in particular, remain important sticking points.

Given that the stock market tends to be forward-looking, is the recent strong rally a signal that China’s economic cycle is about to turn?