Summary
After months of anticipation, Beijing has revealed how it plans to keep the Chinese economy steady – growing at around 5% – in a challenging and uncertain macro environment.
Key points
- Fiscal easing on course: After months of anticipation, Beijing has revealed how it plans to keep the Chinese economy steady – growing at around 5% – in a challenging and uncertain macro environment. Its answer: ramping up fiscal spending, maintaining monetary support, and directing more resources towards boosting consumption and high-tech growth. Most of the numerical targets unveiled at the NPC were in line with the market consensus, although the fiscal plan fell slightly short of the average expectation. Investors will now look for more budget and spending details from upcoming ministerial meetings to gain a complete picture of the extent of the fiscal boost.
- Uncertainty abounds: On paper, a spending package worth c2% of GDP may fall short of what’s required to counteract the macro challenges including the 20% tariff shocks from the US. However, if Beijing is committed to frontloading the spending and getting resources to the hands of consumers fast, the stimulus could provide more bang for the buck. Past experience also suggests that additional support can be allocated later in the year – confirmed by the NPC – if the existing plan fails to hit the targets.
- Markets are content for now: The markets’ calm reaction, despite some disappointment in the fiscal plan, suggests muted policy expectations. Indeed, optimism about AI, as opposed to policy easing, has been behind the recent re-rating of Chinese equities, led by technology stocks. However, without a powerful policy shift to decisively turn around the economy, the ability for this rally to extend beyond tech may be questioned. We maintain an overall neutral stance on China equities, but stay selective across different sectors and indices. For fixed income, upward pressure on bond yields could persist in the near term, given the lack of immediate monetary easing. In relative sense, the growing US recession narratives and the volatility surrounding Trump’s policies are making China’s policymakers appear more accountable, which is encouraging global capital to flow back into China’s riskier assets.
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