Will financial boost from China's "bazooka" stimulus plan prove effective for their economy?
China's Cautious Stimulus Approach: Moderate Optimism, Tempered Expectations
China's economy, showing resilience in the first half of 2025, has been supported by a series of targeted stimulus measures. However, the response from the market has been muted and cautious, as authorities have focused on incremental easing rather than a large-scale stimulus package.
According to finance minister Lan Fo'an, there is "relatively large room" for new state borrowing. Yet, officials in China are likely to implement a limited stimulus rather than a massive one, similar to the response to the 2008 global financial crisis. This strategic approach, favouring measured support and structural adjustments, has led to moderate optimism but tempered expectations about high-impact short-term market rallies.
The removal or relaxation of home-buying restrictions in cities like Beijing, Shanghai, and Shenzhen is seen as a positive, albeit limited, move to stabilize property markets and strengthen market confidence. This policy change, which arrived earlier than expected, has helped calm some investor concerns about delayed stimulus.
China’s economy, despite steady growth around 5%, has not yet seen a significant boost from the stimulus measures. Major financial firms, including Citi and PineBridge, do not expect a large comprehensive stimulus to resolve current economic challenges but anticipate continued targeted support measures. The local CSI 300 index has soared by more than a fifth due to these measures, but Chinese stocks have become more of a trade than a long-term investment.
The market rally is part of a strategy designed to raise economic confidence, according to Ambrose Evans-Pritchard in The Telegraph. The Shanghai market trades heavily on sentiment, with much of the rally being fuelled by fast money betting on the latest government announcements. Markets are hoping for "fresh fiscal spending" of ¥1 trillion-¥3 trillion in China.
Global interest rates are falling, which may give the current rally more "staying power". However, China's officials are aware that a huge fiscal stimulus would exacerbate the "serious imbalances" and debt that caused the economic slowdown. China's goal is to create an "insurance policy" against a serious economic crunch, not a stimulus that would lead to another unsustainable boom.
Investors must wait until later this month for details on new debt issuance to be revealed. Chinese shares are currently undervalued, with a P/E ratio of 11 times forward earnings, according to Chan Ka Sing. Over the past 15 years, Chinese GDP has quadrupled in nominal terms, yet the CSI 300 is up less than a quarter over the same period.
Despite these positive signs, the market remains cautious, waiting for more decisive actions. The response so far reflects recognition of the government’s strategic approach—favoring measured support and structural adjustments rather than immediate large-scale stimulus—leading to moderate optimism but tempered expectations about high-impact short-term market rallies from a "bazooka" package.
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