In November, Beijing announced a $1.4 trillion package to ease local government financing pressures and support sluggish growth, but it stopped short of introducing direct economic stimulus.
This move was anticipated, so Chinese stocks saw a correction instead of a surge. Investors had been hoping for further measures, but the expected news never materialized as time passed.
Then, this Monday morning, the Politburo suddenly announced that it would pursue a more proactive fiscal policy and intensify “unconventional” counter-cyclical adjustments.
For context, China's monetary policy was "moderately loose" last time from 2008 to 2010 to help the economy recover from the global financial crisis. And now, here we are again.
The goal is to stimulate consumption and boost domestic demand. Whether these measures will achieve the 5% annual growth target remains to be seen, but it’s certainly an optimistic step.
The shift from a cautious to a more relaxed monetary policy increases the likelihood of a larger-than-expected fiscal stimulus. With high hopes, the Hang Seng index rose by 2.76%, outperforming the S&P 500 index for a day.
As for timing, it could happen as soon as the Central Economic Work Conference, where top policymakers typically review the year’s economic performance, assess policies, and set priorities for the year ahead.
How will this decision affect global markets?
If the government succeeds in boosting the economy with the new measure, it could increase demand for energy resources, including oil and other commodities such as metals, which could drive up prices.
The problem is that Trump has promised to launch another trade war with China, which could dampen the impact of the new stimulus package. Thus, the growth might not be as significant as hoped.
In this regard, even if the measures are announced this week, it’s possible that additional ammunition will be saved for later to address the fallout from a potential trade conflict with Trump.
Overall, the next few weeks could be crucial for both the Chinese and commodity markets. If Beijing does not disappoint, sentiment could improve, but it is not yet certain for the long term.
Saxo Bank estimates that over CNY 50 trillion (around USD 7 trillion) will be needed in 2025 and the following years. In addition, heavy doses of social engineering may also be implemented.
Who knows, maybe Chinese stocks will outperform the S&P 500 next year, as they seem to have more upside potential given their current valuations. But, of course, the reality could be different.