Chinese stocks experienced a sharp decline on Wednesday, halting a remarkable surge after an expected fiscal stimulus announcement did not materialize.
The CSI 300 index, a key benchmark, closed down 7.1 per cent, revealing the uncertainty surrounding Beijing’s stimulus plans to bolster economic growth and markets.
There was growing anticipation that a round of monetary easing measures aimed at China’s struggling stock and property markets last month would be followed by fiscal spending to stimulate business and consumer spending.
All eyes are now on a press conference scheduled for Saturday by China’s finance ministry to discuss “intensifying countercyclical” adjustments to fiscal policy, as investors seek clarity on Beijing’s strategy to uplift the country’s economy.
What took place on Tuesday?
During a highly anticipated press briefing in Beijing, Zheng Shanjie, chair of China’s National Development and Reform Commission, pledged accelerated bond issuance to support the economy and front-loaded approximately Rmb200bn ($28bn) from next year’s budget for spending and investment projects.
While hinting at measures to stabilize the property sector, boost capital markets, and instill confidence to achieve China’s economic growth target of around 5 per cent this year, the announcements failed to impress many investors. Stock gains on the Hong Kong and Chinese exchanges fizzled, with the Hang Seng index recording its largest single-day drop since October 2008.
Did investors misinterpret signals of a significant stimulus?
The NDRC was not expected to make a major stimulus announcement as it primarily focuses on implementation and oversight rather than central policy formation.
Rory Green, head of China research at TS Lombard, suggested that there may have been an overestimation of Beijing’s immediate plans for broader fiscal stimulus following a late September politburo statement promising stronger support.
Xu Zhong, head of China’s interbank market regulatory body, cautioned investors against misinterpreting the People’s Bank of China’s announcement as evidence of the central bank buying shares.
Are indications pointing towards a fiscal package in the works?
Despite the lack of new details from the NDRC, many observers remain optimistic that more substantial plans will be revealed in the upcoming weeks.
The commission stated that it is working with relevant departments to expand effective investment and fully implement the steps outlined by the politburo, a stance deemed “constructive” by HSBC analysts.
Goldman Sachs analysts also highlighted the potential need for joint efforts from key ministries for any significant stimulus package.
China’s finance minister is set to hold a press conference on Saturday regarding “intensifying countercyclical” adjustments to fiscal policy.
What could a fiscal package entail?
Market participants have proposed a range of estimates, with Citi suggesting a base case of approximately Rmb3tn this year, comprising various allocations to address revenue shortfalls, consumption-led growth, and bank recapitalization.
Nicholas Yeo, head of Chinese equities at Abrdn, emphasized the need for any fiscal stimulus to result in stronger consumption to have a lasting positive impact.
Would a fiscal package be sufficient to aid the Chinese economy?
Over the past few years, there has been a hope for prioritized economic growth from Xi’s administration, but it remains uncertain if fiscal stimulus can restore confidence amidst challenges like the pandemic, property sector crisis, and party control over the business landscape.
There are concerns that structural issues like an ageing population and limited social protection may not be fully addressed by the anticipated fiscal stimulus.