China Fires ‘Bigger Guns, But Still No Bazooka’ – Reuters

By Jamie McGeever

A look at the day ahead in Asian markets.

Sugar High or Shot in the Arm?

That’s the dilemma for Chinese stocks and investor sentiment, which surged on Tuesday following a substantial package of coordinated monetary and liquidity stimulus announced by Beijing, spearheaded by the central bank. This initiative delivered a more significant impact than the previous fragmented efforts.

This marks China’s largest stimulus since the pandemic, prompting domestic and regional markets to react positively—Shanghai’s composite index soared by 4.2%, achieving its best performance since July 2020 and reaching heights not seen since April 2022. Meanwhile, the MSCI emerging market currency index also climbed to a new peak.

However, the pivotal question remains: Can this short-term boost transform into long-term confidence that China’s authorities are back in control and guiding the property sector, asset prices, and the economy towards a sustainable recovery?

Barclays economists aptly described the actions taken on Tuesday as having “bigger guns but still no bazooka,” suggesting that the central bank might launch additional measures in the upcoming months through potential interest rate cuts and adjustments to reserve requirements.

While some analysts have promptly upgraded their 2024 GDP growth forecasts toward the government’s 5% target, many concur that extensive fiscal stimulus is necessary to fundamentally alter the outlook beyond this year.

In the short term, though, the rebound in the Chinese market might have further momentum. Chinese stocks had recently dropped to their lowest levels in over a year and had been underperforming compared to regional and global peers.

Barclays analysts are currently optimistic about Chinese stocks in comparison to Indian equities, highlighting the stark divergence in performance between the two regions in recent years.

Additionally, the yuan reached a new 16-month high on Tuesday and is nearing the crucial 7.00 per dollar mark. For a currency as strictly regulated as the yuan, a 3.5% rise in just two months is quite noteworthy.

Investor sentiment across Asia is likely to receive a further boost from the S&P 500, which recently attained another new high, albeit marginally, alongside a weaker dollar and declining Treasury yields.

Japanese stock futures indicate that the benchmark may open 0.7% higher on Wednesday. However, concerns over global growth, particularly with respect to Germany, could temper bullish sentiments across Asia.

On Wednesday, the regional economic data calendar includes the release of Australian consumer inflation, anticipated to drop significantly to 2.7% in August from 3.5% in July, alongside service sector producer price inflation from Japan and industrial production from Taiwan.

Significant policymakers scheduled to speak include South Korea’s finance minister and the Philippine central bank governor.

Key developments to watch for potential direction in Asian markets on Wednesday include:

• Australia CPI inflation (August)
• Japan services PPI (August)
• Taiwan industrial production (August)