(Bloomberg) — China’s Finance Ministry Briefing Fails to Meet Equity Investors’ Expectations
China’s Finance Ministry briefing on Saturday did not provide the level of support that equity investors were hoping for, suggesting that the market volatility seen after a significant rally will likely continue.
While Finance Minister Lan Fo’an mentioned additional support for the struggling property sector and hinted at increased government borrowing to support the economy, the briefing did not include a specific dollar amount for new fiscal stimulus, disappointing the markets. The lack of new incentives to boost consumption, a weak area in the economy, could also contribute to traders’ disappointment.
Investors have been growing impatient, wanting Beijing to announce substantial fiscal measures to sustain the rally that began following the stimulus measures introduced in late September. The CSI 300 Index, a key indicator of onshore equities, experienced its largest weekly loss since late July on Friday, with volatility increasing ahead of the Finance Ministry briefing.
The Australian and New Zealand dollars, which reflect China sentiment among developed market currencies, both declined by 0.2% in early trading on Monday.
A potential reversal of the rally raises concerns that equities may be heading towards another false dawn, leading to increased selling pressure. The market has experienced cycles of gains and losses before due to Beijing’s incremental approach to stimulus, resulting in only short-lived rebounds.
Local governments will now be permitted to issue special bonds to purchase unsold homes and convert them into subsidized housing, Lan and his deputies announced on Saturday, without specifying the amount of additional stimulus. Lan also suggested the possibility of issuing more sovereign bonds and increasing government spending, with potential announcements expected later this month or early November.
Prior to the weekend, investors and analysts surveyed by Bloomberg had anticipated that China could implement up to 2 trillion yuan ($283 billion) in fresh fiscal stimulus on Saturday, including potential subsidies, consumption vouchers, and financial assistance for families with children.
“The possibility of further fiscal stimulus remains open,” stated Britney Lam, head of long-short equities for Magellan Investments Holdings Ltd. However, she added, “markets are likely to see further profit-taking.”
Released on Sunday, inflation data is expected to compound investor worries. The data revealed that China’s consumer prices rose less than expected in September, while factory-gate charges fell for the 24th consecutive month, underscoring the need for additional policy support to help the economy escape deflation.
The CSI 300 Index declined by 3.3% last week, but remains 21% higher than its closing value on September 23, the day before China’s central bank announced a comprehensive package of measures including an interest rate cut and liquidity support for the equity market. In Hong Kong, the Hang Seng China Enterprises Index dropped by 6.6% last week after surging over 30% in the previous three weeks.
While the remarkable recovery of Chinese shares prompted firms like Goldman Sachs Group Inc. and BlackRock Inc. to upgrade the market, others such as Invesco Ltd. and Morgan Stanley remain skeptical, believing that stocks have advanced too rapidly.
“I’m still somewhat disappointed,” said Kenny Wen, head of investment strategy at KGI Asia Ltd. Although the finance minister announced specific measures, the ‘timing and amount’ were still unspecified.
What Comes Next?
Investors will soon shift their focus to the next significant policy briefing in the upcoming weeks, conducted by the Communist Party-controlled parliament responsible for budget oversight, to learn more about additional stimulus measures. At its October meeting last year, the Standing Committee of the National People’s Congress approved more sovereign debt and increased the budget-deficit ratio.
China’s sovereign bonds experienced minimal changes following the measures announced on Saturday. By midday, the 10-year yield had recovered from an earlier drop of up to two basis points, according to traders who requested anonymity due to restrictions on public commentary regarding the rates market.
A stronger fiscal push is likely to impact China’s bonds by encouraging traders to shift funds towards riskier investments with potentially higher returns. An increase in debt supply could also reduce liquidity in the financial system, making it challenging for the market to absorb the entire amount.
The yield curve is expected to move lower since debt issuance this year may fall below market expectations, as noted by Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group. Moving forward, “we anticipate the announcement of 1 trillion yuan of ultra-long treasury and 1 trillion yuan of local bonds,” Xing added.
–With assistance from Abhishek Vishnoi, Zhu Lin, Wenjin Lv, Shuiyu Jing, April Ma, Matthew Burgess, Michael G. Wilson, and Toby Alder.
(Adds AUD, NZD move in fifth paragraph. An earlier version of this story was corrected to fix gender of a strategist and remove an erroneous reference to stocks in their comment.)
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