Lack Of New China Stimulus Will Favor Bonds, Drag Stocks

By George Lei, Bloomberg Markets Live reporter and strategist

Chinese leaders wrapped up a two-day policy meeting on Tuesday with no major surprises in public statements. Given that the the meeting was meant to set next year’s course for the world’s second-largest economy, the lack of emphasis on fixing real estate woes or stimulating domestic demand sent an ominous signal. Chinese stocks will likely extend their underperformance for the rest of 2023 and possibly into next year. Weak economic fundamentals, on the other hand, should keep supporting government bonds.

While macro policy is likely to continue the accommodative stance observed in 2H 2023, “the probability of bolstered stimulus is low,” JPMorgan analysts led by Chief China Economist Haibin Zhu wrote in a research report on Tuesday after the Central Economic Work Conference. They noted there was little extra news on tackling property-market risks or the potential spillover to local government debt in the readout, only a summary of recent policy announcements.

President Xi Jinping only attended the first half of the Dec. 11-12 meeting before heading to Hanoi for a visit on Tuesday, which might have explained the dearth of fresh initiatives. Most China observers, including Bloomberg Economics, now expect Beijing to stick with its “around 5%” GDP target set for 2023. There could, however, still be disappointments when the actual growth objective is unveiled in the first quarter.

The frequency of the phrase “high-quality development” in Tuesday’s readout more than doubled from a year ago, which reflects China’s focus on “hard technologies critical to lifting productivity, climbing the value chain and grabbing global market share,” Neo Wang, Lead China Macro Analyst at Evercore ISI told Bloomberg. “We expect 4.5%, instead of 5%, to be the anchor point of Beijing’s 2024 real GDP growth target,” he added.

The latest growth messages weren’t received enthusiastically by stock markets. The readout was released after equity trading closed on the mainland and in Hong Kong, and the FTSE China A50 Index futures initially jumped on the headlines before gains petered out. The Nasdaq Golden Dragon Index, which tracks US-traded Chinese companies, rose about 0.4% on Tuesday, lagging advances in the broader Nasdaq gauge.

The onshore benchmark CSI 300 index closed Tuesday about 2.4% above its 2023 low reached on Monday, and could revisit the bottom in the coming days and weeks as this year’s downtrend in equities appears far from over. Historically, the gauge tended to worsen a week after the release of the readouts, data complied by Bloomberg showed.

Status quo, however, favors Chinese government bonds. The 10-year yield on CGBs has fallen almost 20 basis points so far this year to around 2.65% and more declines are expected in 2024. The yield could drop toward a low of 2.3%-2.4% next year amid weak economic fundamentals and loose liquidity conditions, analysts at Guosheng Securities wrote in a report on Monday.