China’s Latest Policy Signals Impact Sentiment More Than Deeper Issues #

China’s recent policy signals have had a significant impact on market sentiment, although they may not address deeper economic issues such as the real estate sector, according to analysts.

The Shanghai Composite rallied to a three-month high following reports of a high-level Politburo meeting on the economy led by President Xi Jinping. The meeting called for halting the property market decline and strengthening fiscal and monetary policy, although it provided few specifics.

Analysts suggest that while this “shock and awe” strategy could jumpstart markets and boost confidence, well-thought-out policies are still necessary to address deep-rooted problems. The impact of additional stimulus is estimated to be limited, not exceeding 3% of China’s annual GDP.

China’s economy has been facing challenges, with slow growth in retail sales, industrial profits, and a contracting real estate sector. The central bank has cut major interest rates and announced plans to lower rates for existing mortgage holders, but some investment institutions believe these measures are insufficient to change their outlook on China.

There are concerns about whether Beijing is willing to extend the large stimulus needed to reverse the psychological damage to household and private business sentiment. The government’s recent crackdowns on various industries have affected business and consumer confidence, which has yet to recover despite policy easing.

A survey of companies in China found that corporate borrowing declined despite historically low costs. Some analysts expect retail sales could pick up slightly in the coming months, and the rally in Chinese stocks may continue into the last quarter of the year.

The sentiment shift has spread globally, with some investors increasing their holdings in Chinese stocks. The CSI 300 stock index has climbed, on pace for its best week since 2008.

An important takeaway from the high-level government meeting was the support for capital markets, which contrasts with the more negative perception of the financial industry in recent years. Some believe this meeting could correct misperceptions and emphasize the importance of a well-functioning capital market for China’s healthy growth.

While the government’s messages may not be entirely new, the emphasis on detailed action plans has made a difference in market perception.