Disappointing policy measures put a dent in China’s equity rally

China equities have been rallying since late September, fueled by a series of economic, financial, and market-support measures that have restored investor confidence. The Hang Seng China Enterprises Index, which tracks Chinese stocks listed in Hong Kong, has soared over 35% in the past month, making it the top performer among more than 90 global equity benchmarks monitored by Bloomberg.

However, a new announcement today – that many analysts call “underwhelming” and “disappointing” – put a dent into the week-long rally of Chinese equities. The CSI 300 Index rose 5.9%, the Shanghai Composite closed 4.6% higher and Hong Kong’s Hang Seng index closed 9.4% lower – its heaviest fall since 2008. When the stock markets opened in the morning, before the press conference of the National Development and Reform Commission (NDRC), the CSI 300 rose by more than 10%.

As the NDRC announced, China will issue 200 bn yuan ($28bn) for spending and investment projects by the end of this year. Furthermore, the government will speed up the issuance of special-purpose bonds by local governments and continue to issue ultra-long-term special government bonds next year.

“While Beijing is keen to revive equities, it does not feel compelled to abandon financial restraint to aggressively stimulate the real economy,” commented market researcher 22V Research.

Market observers say that more fiscal policy and measures to support the economy and the property market are needed for the rally to be sustainable. The new support measures outlined today might not go far enough since they are, again, missing a significant stimulus package.

“The market is reacting to the lack of a real fiscal stimulus. I would not have organised a press conference not to announce anything new,” said Alicia Garcia-Herrero, chief economist for the Asia Pacific region at investment bank Natixis. “The market really expected more. The correction will be even stronger if the data on the Golden Week in terms of consumption is weak,” she added.

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China just came out of a week-long holiday period, the National Day Golden Week. Initial official estimates indicate a significant tourism boom, which suggests greater consumer confidence.

NDCR chairman Zheng Shanjie noted that the “downward pressures on China’s economy is increasing” but said that he is “fully confident” the country will achieve its full-year economic and social goals. The country’s annual growth target is “around 5%.”