CIO thinks the combination of more engagement from top leaders, improving economic data, and a stronger policy response could be a catalyst for equity markets in China. (ddp)

The new funding, which will lift the budget deficit this year from 3% to 3.8% of GDP, will primarily go to infrastructure and reconstruction efforts. Legislators also renewed authorizations to frontload some of the next year’s new local government bonds, in line with expectations, while President Xi Jinping made his first known visit to the People’s Bank of China (PBoC).

US-listed Chinese stocks rallied on Tuesday in response to the headlines, with ADRs rising roughly 4.2%. That optimism faded in the Asia session though, with the Hang Seng China Enterprise index and the CSI 300 Index both retreating from early-session peaks to post only modest gains.

Some uncertainty over the rally is warranted, given prior false starts and risks surrounding the struggling property sector. But, we see reason for more optimism in this latest development:

Rare budget revision confirms a more pro-growth stance. After months of more modest support measures, this extra bond issuance and fiscal spending confirms a strong swing in China’s fiscal impulse to a more pro-growth stance. We think the extra infrastructure spending could lift 2024 GDP growth by 0.4 to 0.8 percentage points, increasing the chance that GDP growth next year beats the consensus 4.5% forecast. We expect next week's Central Economic Work Conference in Beijing to reveal more reform plans, infrastructure spending, and resolution efforts on debt and property. We also see room for more monetary easing ahead, including additional cuts to the policy lending rate and to banks’ reserve requirement ratios.

Top leaders are signaling their focus is on the economy and financial markets. President Xi’s first known visits to the central bank and currency regulator SAFE in his 10 years as president suggest a new top-level emphasis on economic policy and currency stability. Next week’s National Financial Work Conference will be presided over by Xi Jinping. Alongside the extra fiscal stimulus, China’s top legislative body this week also confirmed Lan Fo’an as the new finance minister, giving President Xi another veteran alongside the new PBoC head to implement policy priorities. Recent public comments from other ex-PBoC officials, meanwhile, suggest meeting the “near 5% “growth target next year is seen as critical by top leaders.

Increased policy support and improving data should boost sentiment. The extra spending comes after third-quarter GDP beat expectations and confirmed a likely bottom to economic activity—suggesting policymakers are seeking to build on momentum to boost confidence. Improving investor sentiment could increase interest in appealingly valued Chinese stocks, in our view. The MSCI China’s forward price-to-earnings now stands near 9x, compared to the 10-year average of 12x. We remain most preferred on China equities in our Asia strategy, and most preferred on emerging markets in our global strategy.

So, we think the combination of more engagement from top leaders, improving economic data, and a stronger policy response could be a catalyst for equity markets in China. Within Chinese equities, internet and consumer names that are oversold and have a high correlation with macro sentiment should benefit. More direct beneficiaries of sustained infrastructure spending include material and industrial names. We retain our growth-tilted barbell positioning in Chinese stocks, which favors both defensive and high growth names. Outside China, increased raw material use should support commodity prices, boost global miners, and lift popular risk proxies like the Australian dollar.

Read the original report : Stimulus raises hopes for a China rebound, 25 October 2023.