China Traders Pray More Stimulus Will Revive Equities Rally

(Bloomberg) --

Investors in China are counting on more stimulus from Beijing as the catalyst that will put a charge in the country's languishing financial markets.

That's down to expectations the government will announce additional measures to boost consumption and investment at the key annual meetings of the country's top legislature next month, which will also map out economic targets. This year's session, set to start May 22, will be later than usual due to the coronavirus outbreak. Official data released Thursday showed manufacturing activity for April moderated from a month earlier.

While China's markets have stabilized in recent weeks, investors are no longer seeing the world-beating returns of earlier this year. The Shanghai equity benchmark is lagging the MSCI Inc. index of global stocks this month by the most in four years. The yuan eked out a small gain, while the yield on 10-year sovereign debt has held near an 18-year low. With companies reporting first-quarter earnings, investors are starting to see the impact of the economic shutdown on bottom lines.

“This year's National People's Congress meeting is especially important because it will set the tone for China's economic, fiscal, and monetary policies amid the unprecedented impact from the virus,” said Li Changmin, managing director at Snowball Wealth in Guangzhou.

Chinese policy makers have signaled more support measures are coming, including allowing for a higher fiscal deficit. That follows measures like multiple policy rate cuts from the central bank, a massive new quota for local government debt sales, and targeted tax credits and loans aimed at smaller companies.

Still, central bank Governor Yi Gang this week indicated the People's Bank of China will stick to its prudent approach to monetary stimulus rather than risk stoking consumer prices. China's officials purchasing managers index for April was 50.8, lower than the 52 figure for March and the 51 economists had predicted. The Shanghai Composite Index rose 1.3% on Thursday, while the yuan added 0.4%.

Early indicators had suggested the nascent rebound is already losing pace amid signs of a global recession and weak local demand. China's economy suffered a historic contraction in the first quarter, with gross domestic product shrinking 6.8% from a year ago.

The lukewarm stimulus, when compared to the extreme moves taken by central banks elsewhere, has meant investors have held their fire when it comes to the stock market. The Shanghai Composite Index rose 4% in April, compared with a roughly 12% gain in the MSCI All-Country World Index. Technology shares were the best performers on the mainland, while energy stocks fell.

Government bonds extended their rally into a sixth month, but the advance was tepid, with the 10-year yield falling about 6 basis points to 2.52%. The yuan eked out a gain.

©2020 Bloomberg L.P.

With assistance from Bloomberg