China’s highly anticipated Finance Ministry briefing on Saturday lacked the firepower that equity investors had hoped for, indicating that the volatility that has gripped the market following a world-beating rally will likely extend.
While Finance Minister Lan Fo’an promised more support for the struggling property sector and hinted at greater government borrowing to shore up the economy, the briefing didn’t produce a headline dollar figure for fresh fiscal stimulus that the markets had sought. A lack of new incentives to boost consumption, which has been a weak link in the economy, is another reason why traders may feel disappointed.
The ministry “tried its best,” but there is a large gap between what was announced and what the market was expecting, says Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co. “So the overall sentiment for investors is negative.”
Patience has been wearing thin among investors, who have clamored for Beijing to announce big-bang fiscal measures to help sustain the rally sparked by the stimulus blitz that authorities unleashed in late September. The CSI 300 Index, a benchmark of onshore equities, capped its biggest weekly loss since late July on Friday, with volatility rising ahead of the MOF briefing.
The Australian and New Zealand dollars, proxies for China sentiment among developed market currencies, both slipped 0.2% in early trading Monday.
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A further unwinding of the rally risks fueling concern that equities are heading for yet another false dawn, which may bring more selling pressure. The market has been caught in a start-stop cycle of gains and losses a few times before as Beijing’s piecemeal approach to stimulus produced only brief rebounds.
Local governments will be allowed to issue special bonds to buy unsold homes and turn them into subsidized housing, says Lan and his deputies on Saturday, while refraining from putting a price tag on any additional stimulus. Lan also hinted at room for issuing more sovereign bonds and greater government spending, steps that could be announced later this month or early November.
Prior to the weekend, investors and analysts surveyed by Bloomberg had expected China to deploy as much as RMB2 trillion (US$283 billion and $369.9 billion) in fresh fiscal stimulus on Saturday, including potential subsidies, consumption vouchers and financial support for families with children.
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“The room for further fiscal stimulus is still on the table,” says Britney Lam, head of long-short equities for Magellan Investments Holdings Ltd. In the meantime, “markets will likely see further profit taking,” she adds.
Inflation data released on Sunday is likely to add to investor concerns. It showed that China’s consumer prices rose less than forecast in September, while factory-gate charges fell for a 24th straight month, underscoring the need for further policy support to help the economy break out of deflation.
The CSI 300 Index slid 3.3% last week, but it’s still up 21% from its close on Sept. 23, the day before China’s central bank announced a broad package of measures that included an interest-rate cut and liquidity support for the equity market. In Hong Kong, the Hang Seng China Enterprises Index lost 6.6% last week after surging more than 30% in the previous three weeks.
While the epic rebound in Chinese shares has spurred the likes of Goldman Sachs Group Inc. and BlackRock Inc. to upgrade the market, it has also drawn skepticism from others such as Invesco Ltd. and Morgan Stanley who say stocks have already run too far too fast.
“I’m still a little bit disappointed,” says Kenny Wen, head of investment strategy at KGI Asia Ltd. While the finance minister announced some specific measures, the ‘timing and amount’ were still missing.
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Investors will soon turn attention to the next major policy briefing in the coming weeks — from the Communist Party-controlled parliament that oversees the budget — for details of more stimulus. At its October meeting last year, the Standing Committee of the National People’s Congress approved additional sovereign debt and raised the budget-deficit ratio.
China’s sovereign bonds were little changed on the measures announced on Saturday. By noon on the day, the 10-year yield had erased an earlier drop of as much as two basis points, according to traders, who asked not to be identified as they are not allowed to comment publicly on the rates market.
A strengthened fiscal push would likely weigh on China’s bonds by encouraging traders to move funds into riskier investments with potentially better returns. An increased supply of debt may also sap liquidity in the financial system, making it harder for the market to absorb the entire amount.
The yield curve will probably move lower, given debt issuance this year may come below market consensus, says Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group. Going forward, “we expect RMB1 trillion of ultra-long treasury and RMB1 trillion of local bonds to be announced,” he adds.
