Chinese Stocks Face Pressure as Fiscal Stimulus Underwhelms

Chinese stocks have been under pressure in recent weeks as investors reacted to the government's fiscal stimulus package, which fell short of market expectations. The announced measures, totaling 10 trillion yuan ($1.4 trillion), focused on debt swaps for local governments rather than broader fiscal support, disappointing investors who had anticipated a more significant stimulus to boost business sentiment and employment.
The market's initial reaction to the stimulus announcement was mixed, with some investors hoping for more substantial measures and others welcoming the steps taken. However, as the details of the stimulus package became clearer, investor sentiment shifted towards disappointment, leading to a sell-off in Chinese stocks. The iShares MSCI China ETF (MCHI) and U.S. traded shares of Alibaba, JD.com, and PDD all fell between 3% and 5% in premarket trading, reflecting the market's disillusionment with the stimulus plan.
The stimulus measures announced by China, including mortgage rate cuts and liquidity injections, initially sparked a rally in Chinese equities, with the CSI 300 and Hang Seng indices surging. However, investor sentiment turned sour following the disappointing fiscal stimulus package, leading to a 7.1% drop in the CSI 300 on Oct. 9. This volatility reflects investors' eagerness for concrete fiscal support to boost consumer and business confidence. Despite the pullback, long-term fundamentals remain intact, driven by sharp valuation disconnects.
The underwhelming fiscal stimulus in China could have significant long-term effects on the country's economic growth and stock market performance. The stimulus, announced in October 2024, fell short of market expectations, leading to a sharp decline in Chinese stocks and ETFs (Investopedia). The stimulus package, totaling 10 trillion yuan ($1.4 trillion), focused on debt swaps for local governments rather than broader fiscal support, disappointing investors (Bloomberg). This lackluster response may indicate a continued focus on supply-side reforms, potentially hindering demand-side growth. In the long term, this could lead to a slowdown in economic growth, as consumption and income redistribution remain neglected. However, with the right policies, China's potential for supply-side growth remains decent.
The response to China's fiscal stimulus announcement varied among domestic and foreign investors. Domestic investors, such as retail investors and state-owned enterprises, initially reacted positively to the news, with the CSI 300 Index and Hang Seng Index experiencing significant rallies. However, this enthusiasm waned as questions arose about the effectiveness and scale of the stimulus. Foreign investors, on the other hand, were more cautious. While some, like Morgan Stanley and Credit Suisse, upgraded their outlooks for Chinese stocks in 2023, others, like UBS, maintained a neutral stance. Foreign investors seemed to be more focused on the long-term potential of the Chinese market, rather than the immediate impact of the stimulus.
Geopolitical tensions and global market conditions played a role in exacerbating the impact of the fiscal stimulus disappointment on Chinese stocks. The US-China trade war and escalating geopolitical tensions, as highlighted in the Bloomberg article (Number: 2), contributed to market uncertainty. Additionally, the global market's focus on the US election and potential stimulus measures further distracted investors from China's domestic developments. The weak global economic outlook, exacerbated by the COVID-19 pandemic, also dampened investor sentiment towards Chinese stocks.
In conclusion, the underwhelming fiscal stimulus in China has put pressure on Chinese stocks, leading to a sell-off in recent weeks. While the stimulus package aimed to address the slowdown in the economy, investors were disappointed by the lack of broader fiscal support. The long-term effects of the underwhelming stimulus on China's economic growth and stock market performance remain to be seen, but the potential for supply-side growth remains decent with the right policies. The response to the stimulus announcement varied among domestic and foreign investors, with domestic investors initially reacting positively and foreign investors maintaining a more cautious stance. Geopolitical tensions and global market conditions exacerbated the impact of the fiscal stimulus disappointment on Chinese stocks, contributing to market uncertainty and dampening investor sentiment.