Markets Anticipate “Significant” Fiscal Stimulus from China, According to UBS

Markets are increasingly anticipating a substantial fiscal stimulus package from the Chinese government, alongside several recently announced measures aimed at bolstering the nation’s struggling economy, according to UBS analysts.

In September, Chinese authorities introduced a comprehensive set of policies, which included a significant reduction in interest rates and lower costs for existing mortgages.

The People’s Bank of China rolled out a swap program initially valued at 500 billion yuan, aimed at providing easier access to funding for funds, insurers, and brokers to buy stocks. Additionally, the PBOC pledged up to 300 billion yuan in affordable loans to commercial banks to facilitate share purchases and buybacks by publicly listed companies.

Following last month’s announcement, Chinese stocks experienced their strongest weekly performance in nearly 16 years, a rally that continued into the subsequent week.

In their note to clients, UBS analysts indicated that some market participants are speculating that China could introduce a fiscal stimulus package exceeding 10 trillion yuan. However, they believe it may be more realistic to anticipate a “more modest package of 1.5 trillion to 2 trillion yuan in the near term,” with an additional 2 trillion to 3 trillion yuan of fiscal expansion expected next year.

The analysts suggested that an announcement regarding 2024 stimulus could take place immediately following the October holiday or around the release of third-quarter data on October 18. Decisions regarding measures for 2025 might be made around the Central Economic Work Conference in December 2024.

In a separate commentary, analysts at Morgan Stanley noted that the scale and timing of the expected stimulus are likely to be viewed favorably by local investors, as it underscores Beijing’s commitment to revitalization through more coordinated policy efforts, albeit through a traditional trial-and-error approach.

Despite consumer prices in China rising at their fastest rate in six months in August, this increase was primarily attributed to surging food prices due to weather-related disruptions rather than a sustainable rebound in domestic demand.

Morgan Stanley analysts expressed cautious optimism, stating, “We are hopeful but not yet confident” that China’s policy shift will stimulate growth in the world’s second-largest economy.