Chinese stocks, particularly those listed in Hong Kong, experienced a late-day rebound after the country’s top leadership unveiled plans to ease monetary policy and increase fiscal spending. The Hang Seng China Enterprises Index, which had been showing a modest drop, surged 3.1% by the end of the trading day, marking its largest gain since October 18.
In addition to the rally in stocks, the yield on China’s 10-year government bonds dropped to a record low of 1.91%, falling by five basis points. The offshore yuan also recovered, strengthening by 0.1% against the US dollar.
Politburo’s Pledge to Support the Economy
The Politburo, China’s ruling body, announced a shift in economic policy on Monday, pledging to adopt a “moderately loose” monetary policy in 2025. This marks the first major policy change of this nature since 2011. The statement also focused on stabilizing the property and stock markets, providing immediate reassurance to investors.
This announcement was seen as a positive sign that Chinese authorities are determined to support the economy amid growing global trade tensions. The news provided an instant boost to market sentiment, with analysts suggesting that more aggressive economic stimulus may be on the horizon.
Jeremy Yeo, an analyst at SMBC Nikko Securities, stated, “The readout today seems very proactive, with China focusing on stabilizing asset prices and stimulating demand.” Yeo also highlighted that if China takes further steps to address deflation this week, it could be a game-changer for the economy.
Other Currencies Linked to China Also Rise
Other currencies closely linked to the Chinese economy also experienced gains following the announcement. The Australian dollar rose by 0.8%, and the New Zealand dollar increased by 0.6%.
However, on the mainland, the CSI 300 Index, which tracks onshore shares, closed 0.2% lower before the Politburo’s announcement. Despite the slight decline, the overall market sentiment improved sharply following the release of the policy statements.
The Politburo’s December Meeting and Future Economic Priorities
The Politburo’s meeting sets the stage for the Central Economic Work Conference (CEWC), which begins on Wednesday. This meeting will lay out key priorities for the country’s economy in the coming year, including setting annual growth targets and formulating more specific policies.
Many investors were hopeful that the CEWC would provide further guidance for the stock market, which has lost steam since a stimulus-driven rally earlier this year. The Hang Seng China Enterprises Index, which had rebounded by nearly 40% through October 7, has since fallen by over 11%.
The latest consumer price data, which showed a weaker-than-expected 0.2% rise in the Consumer Price Index (CPI) from a year earlier, suggests that there is a pressing need for China to ramp up efforts to boost economic growth. Factory deflation also continued for the 26th consecutive month, adding to the pressure for more aggressive policy action.
Skepticism Remains Among Some Investors
Despite the policy pledges, some investors remain cautious about the potential for meaningful change. Homin Lee, senior macro strategist at Lombard Odier, stated, “The hurdle to change our mind on making China a tactical overweight within the EM equity allocation remains quite high. A shift in our outlook would require a fundamental change in China’s monetary policy framework, which we don’t believe is imminent.”
Key Insights From Analysts
Analysts have shared differing views on the Politburo’s recent announcements. Zhaopeng Xing, senior China strategist at ANZ Bank, described the statement as “unprecedented” and suggested it signals strong fiscal expansion, significant rate cuts, and potential asset buying by the government.
Becky Liu, head of China macro strategy at Standard Chartered Bank HK, warned that more aggressive monetary easing could follow, noting that the outlook for China’s 10-year government bond yields could dip below their current forecast of 1.80% by 2025.
Chunai Jean, senior strategist at Daiwa Asset Management in Tokyo, emphasized that the “moderately loose” stance on monetary policy is a significant shift. Expectations for concrete policy actions are high ahead of the CEWC.
However, some analysts, like Sat Duhra, portfolio manager at Janus Henderson Investors, were less optimistic, stating that while the Politburo’s statement offers some guidance, it lacks the detailed policy steps investors are hoping for.
Conclusion
While the Politburo’s announcement has provided short-term support for Chinese stocks and the yuan, investors will be watching closely for further actions from the Central Economic Work Conference. The government’s ability to address deflation, stabilize asset prices, and boost economic growth will be critical in shaping the future of China’s economy.
For now, there is cautious optimism that Beijing will continue its efforts to stimulate growth, but skepticism remains about the effectiveness of these measures in the long term. The markets will likely remain volatile as investors await more concrete steps.
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