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Macroscope | Will China’s fiscal bazooka fire as forcefully as investors hope?
As Beijing prioritises stability and development over reflation, investors must reconcile themselves to the realities of Chinese policymaking
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There are plenty of sceptics and critics when it comes to China’s latest stimulus package. But even the naysayers admit Beijing has changed the calculus for the performance of Chinese stocks. Before the bevy of measures were announced in late September, the odds of a durable rally were slim to none.
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Fast forward to today and the outlook for Chinese equities is no longer a one-way bet. Morgan Stanley believes a policy pivot has occurred but asks whether it is “sufficient to deliver an exit from deflation”. The company sees a “wide range of potential outcomes” for Chinese and other Asian stock markets.
To be sure, the uncertainty stems from several factors. The stunning victory of Donald Trump in the US presidential election has provided impetus to the rally in the dollar, driven bond yields higher and set the stage for more punitive tariffs on imported goods. With Trump enjoying a much stronger mandate than when he was elected in 2016, more nationalist and protectionist policies that stoke inflation are in store.
The most important determinant of sentiment towards China, however, is the much-anticipated yet contentious fiscal component of the stimulus package.
By announcing a series of aggressive measures to recapitalise banks, refinance local government debt and buy unsold houses to reduce inventory, Beijing unleashed a torrent of speculation over the scale of the fiscal stimulus in the coming years.
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The lack of clarity over the size and composition of the package has resulted in a dangerous mismatch between the expectations of investors and Beijing’s priorities.
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