China may still need to pack on more policy initiatives

Reuters

China may still need to pack on more policy initiatives

2024 10월 14, 오후 4:36 GMT

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CHINA MAY STILL NEED TO PACK ON MORE POLICY INITIATIVES

After floundering in a bear market for three and a half years, Chinese equities have surged in the past month on the surprise announcement of broad stimulus.

Here is a chart of the China's CSI 300 index .CSI300 showing an eruption higher off of the mid-September trough:

This development raises several questions.

Will the stimulus be enough to light a fire under consumer confidence and propel growth toward 5%? Will it be able to address the structural constraints weighing on China’s future? Or does it simply supercharge the more traditional infrastructure/export sectors of the Chinese economy?

"While clearly welcome, the efforts may be insufficient to spur a new reflationary cycle," writes Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management in a note.

She adds that "Chinese consumer confidence has been shattered by falling real estate values, an equity bear market and poor youth employment prospects."

Monetary policy alone may be pushing on a string, and as Shalett sees it, fiscal policy initiatives will likely be required. And this, she says, with Chinese stock valuations that are not exactly cheap relative to history.

According to Morgan Stanley research analysts, addressing root causes might require a program as high as 10 trillion renminbi — which Shalett says is close to five times near-term stimulus projections.

Shalett also notes a series of risks including China’s vulnerability around excess manufacturing capacity, the potential for an escalation on the tariff front, and heightened geopolitical tensions.

Ultimately, however, "the beneficiary of a more stable China may be the rest of the world, as greater short-term global liquidity helps trade," writes Shalett.

To this end, she believes investors should consider adding to global, non-US and non-China EM equities as part of a diversified portfolio. She also thinks that U.S. cyclicals may get a short-term boost.

Meanwhile, UBS analysts are also weighing in on the state of China's broad economic stimulus promises.

(Terence Gabriel)

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