What investors expect from China’s big stimulus measures – BNN Bloomberg

(Bloomberg) — Chinese markets capped a tough week with a 2.8% drop in the CSI 300 index and a rally in corporate bonds, as all eyes turn to the Finance Ministry’s policy briefing Saturday for clues on possible new fiscal stimulus measures.

Actions will be the clearest barometer of success. Their extreme volatility over the past week, along with enormous positioning and speculation on both sides, raises the possibility of a burst of joy or a dip of disappointment. So what’s on the bingo card?

A large number

Investors appear to have focused on 2 trillion yuan ($283 billion) as the deciding criterion for this meeting, even though expectations for fiscal stimulus through 2025 range from 1 trillion yuan to more than 3 000 billion. However, it is also possible that there is no firm indication of a figure, as extra-budgetary funding likely requires approval from the Standing Committee of the National People’s Congress, China’s top legislature, which does not meet until later this month.

The devil in detail

Bond investors will want to know how much of this stimulus will be net new issuance (in the form of government debt or special sovereign bonds). It’s possible that smart accounting means a lot of the “new” money could come from existing cash piles, unused or unspent debt issuance allowances, or raids on various corporate finance funds and governments for difficult days. Authorities or the central bank could also find ways to help the market absorb any new supply.

The beneficiaries

Many market commentators say the size of the funding is less than what the authorities actually intend to do with it. So far, the measures announced seem more favorable to the markets than to the underlying economy.

Investors will be looking to see if some of the stimulus is targeted at consumption, which is a weak point in China’s post-pandemic recovery. An impressive effort in this area would be seen as positive, as would greater support for the real estate sector, local government finances and the country’s banks. Increased investments in infrastructure and announcements of scrappage bonuses could receive a less favorable reception.

The framing

It’s not just about what they say, but also how they say it. Tuesday’s National Development and Reform Commission briefing stood in stark contrast to one held by the People’s Bank of China on Sept. 24, when central bank Governor Pan Gongsheng and other senior officials unveiled a series of measures, including interest rate cuts, more liquidity. for banks, greater incentives for home purchases and a plan to consider an inventory stabilization fund. This helped fuel the epic rally in Chinese stocks. But traders reassessed their positions after the NDRC effectively threw cold water on this rally with a more concrete reissue of old documents.

The 5% growth target

Is it still on? A commitment to achieving or getting close to it should give investors confidence that China will do what it takes to provide an immediate boost to growth.

And what about 2025?

The more a vision is defined for continued recovery and supportive (or deficit spending) policy, the more confidence investors can take from the meeting – and that will matter a lot for the most important thing from our perspective:

Market reaction

Chinese government bonds will be traded on Saturday in the interbank market, as it is a business day in China. Extensive deficit spending or wildly positive, inflationary moves could hurt government bonds, while a sense of underachievement relative to expectations could spark a rally.

Then on Monday, a huge surprise, shock or disappointment could shake things up at the start of the market week. Besides stocks, Chinese indicators like the Australian dollar will give the first indication of the scope of the lessons learned from the meeting.

China’s commodity markets will also respond early, and while support for consumer spending and local governments may improve confidence, it may not move much in terms of actual demand for natural resources.

And that may not be the end of the story. Some investors are confident that after committing to implementing stimulus measures, China will continue its waves of support until it achieves the desired result. At the same time, skeptics fear a repeat of the recovery cycle ending in disappointment that has characterized Chinese markets in recent years.

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