China stocks climb on hopes of more stimulus

Reuters Shanghai | Updated on January 19, 2018 Published on January 19, 2016


China stocks rebounded roughly 3 per cent on Tuesday, as weak quarterly economic data strengthened market expectations the government will unveil more stimulus moves.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen rose 3.0 per cent to 3,223.13, while the Shanghai Composite Index gained 3.2 per cent to 3,007.74 points.

China’s economic growth eased to 6.8 per cent in the fourth quarter from a year earlier, matching expectations but still the slowest since the global financial crisis, putting pressure on policymakers to roll out more support measures.

Yet growth of 6.9 per cent for 2015 as a whole was still the slowest in a quarter of a century, while monthly readings on industrial output and retail sales were weaker than expectations.

Output rose 5.9 per cent compared with December 2014, while sales growth confounded analysts by pulling back to 11.1 per cent. The latter disappointed those counting on the consumer to be the engine of growth while world trade remains becalmed.

"China is in a debt, deflation-led economic slowdown, and the process is very difficult for traditional monetary and fiscal policy to change the trend of the growth path - that is continued slowdown in the coming years," said Liu Li Gang, an economist at ANZ in Hong Kong.

Offshore investors were clearly unimpressed and took to selling the Australian dollar as a liquid proxy for expressing bearishness on China.

Yuan midpoint

The People's Bank of China (PBOC) did its bit to try to calm nerves by keeping the yuan largely steady, setting the currency's midpoint fix at 6.5596 per dollar.

That followed news of plans requiring overseas banks to hold a certain level of yuan in reserves, a move that could raise the cost of wagering on further falls in the currency.

Currency risk

Tommy Xie, economist at OCBC Bank in Singapore, said he expected more stimulus to the economy from the PBOC, but the stability of the yuan, also known as the renminbi, was critical to maintaining growth.

"This is a new risk for China. If the renminbi continues to weaken, the volatility and capital outflows get worse, then that is likely to pose a challenge to growth."

The spot yuan was at 6.5793, little changed from Monday's close, but offshore it weakened 100 pips during the morning to 6.5960, nearly 0.3 per cent adrift from the onshore rate.

Mayhem in financial markets

Confusion over China's currency policy and its commitment to reforms has sparked mayhem in financial markets in recent weeks, as the PBOC allowed the yuan to fall sharply in early January then switched to aggressive intervention to steady it.

Likewise, concerns have mounted that the economy's troubles might be beyond Beijing's ability to fix.

Markets have long harboured doubts about the veracity of China's growth data, given their habit of closely matching official forecasts year after year despite wildly changing circumstances at home and globally.

Investors used to comfort themselves with the assumption that the authorities, while often inscrutable, were competent managers who could be trusted to ultimately guide the economy to a more consumer-driven model.

That trust has been challenged by perceived policy missteps over the yuan and stock markets, giving weight to a voluble clique of China bears who claim high debt levels and massive overcapacity are bound to end in tears.

Even relative optimists are worried.

"A recent trip back to China suggests the economy remains in a rather bad shape. Public confidence and expectations are very low," says Wei Li, China and Asia economist at Commonwealth Bank of Australia.

"Faced with rising non-performing loans, banks are cutting credit lines despite policymakers calling for more support. New credits are mainly used to repay existing debts, rather than flowing into new investment projects."

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Published on January 19, 2016
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