(Bloomberg) -- China’s markets rounded out a rocky week with a 2.8% slide in the CSI 300 Index and a rally in corporate bonds, as all eyes turn to the Ministry of Finance policy briefing on Saturday for clues on any fresh fiscal stimulus.
Stocks will be the clearest barometer of success. Their extreme volatility in the past week and the huge positioning and speculation on both sides suggest scope for a leap of joy or a slump in disappointment. So what’s on the bingo card?
A Big Number
Investors seem to have honed in on 2 trillion yuan ($283 billion) as the make-or-break yardstick for this meeting, although expectations for fiscal stimulus through 2025 range from 1 trillion yuan to more than 3 trillion. However, it’s also possible there’s no firm guidance on a number, as extra budget funding probably needs approval from the Standing Committee of the National People’s Congress, China’s top legislature, which only meets later this month.
The Devil in the Detail
Bond investors will want to know how much of this stimulus will be net new issuance (either as government debt or special sovereign bonds). It’s possible that some clever accounting will mean a lot of the “new” money could come from existing piles of cash, unused or unspent quotas of debt issuance or raids on various corporate and government rainy-day funding pots. Authorities or the central bank could also find ways of helping the market absorb any new supply.
The Beneficiaries
Many market commentators are saying the size of the funding package is less important than what authorities actually intend to do with it. So far, measures that have been announced look more supportive for markets than the underlying economy.
Investors will be looking to see whether a portion of the stimulus is targeted at consumption, which has been a weak spot in China’s post-pandemic recovery. An impressive effort in this area would be taken as a positive, as would stronger support for the property sector, local government finances and the nation’s banks. More infrastructure investment and cash for clunkers announcements may get a less favorable reception.
The Framing
It’s not just what they say, but how they say it. The National Development and Reform Commission briefing on Tuesday stood in stark contrast to the one spearheaded by the People’s Bank of China on Sept. 24, when central bank Governor Pan Gongsheng and other top officials unveiled a barrage of measures including interest rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilization fund. That helped fuel the epic rally in Chinese stocks. But traders reassessed their positions after the NDRC effectively poured cold water on that rally with a more matter-of-fact re-run of old material.
The 5% Growth Goal
Is it still on? A commitment to meet it or get close should provide investors with confidence that China is going to do what it takes to give an immediate shot in the arm to growth.
And What About 2025?
The more a vision is mapped out for ongoing stimulus and supportive policy (or deficit spending), the more confidence investors may take from the meeting — and that will matter a lot for the most important thing from our perspective:
The Market Reaction
China’s government bonds will be trading Saturday in the interbank market, as it’s a working day in China. A lot of deficit spending or extremely positive and inflationary measures may dent government bonds, while a sense of under-delivery versus expectations may provoke a rally.
Then on Monday, a huge surprise, shock or disappointment could shake things up right at the start of the markets week. Aside from stocks, China proxies like the Aussie dollar will give the first indication of how far-reaching the takeaways from the meeting are.
Chinese commodities markets will also be early to react, and while support for consumer spending and local governments may help sentiment, it may not move the needle that much in terms of actual demand for natural resources.
And that may not be the end of the story. Some investors are convinced that, having committed to stimulus, China will keep going with further waves of support until it gets the outcome it desires. Meanwhile, skeptics fear a repeat of the rally-ending-in-disappointment cycle that has characterized China’s markets in recent years.
- NOTE: Paul Dobson writes for Markets Live. The observations he makes are his own and are not intended as investment advice. For more markets commentary, see the MLIV blog.
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