China’s stock rally may see another 20 per cent upside, as fiscal pivot boosts sentiments

US money manager Invesco, citing expectations of fiscal stimulus, predicts another 20 per cent gain in stocks from the current level – even after the Hang Seng Index technically entered a bull market with a rally of more than 20 per cent from an August low. The CSI 300 Index jumped 15.8 per cent this week, the best performance for the mainland’s benchmark since its inception in November 2008.

“I take the messages from this meeting as a positive step to address the economic challenges that China faces,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management in Hong Kong. “The fiscal policy in China has been procyclical so far this year. It will likely turn countercyclical after this Politburo meeting, though the magnitude is unclear yet.”

The hint at expansionary fiscal policy adds to the monetary easing unveiled by the central bank earlier this week, which introduced 800 billion yuan (US$114 billion) in funding facilities for stock purchases and pledged to cut policy and mortgage rates. Investors see a more proactive fiscal policy as crucial to aid a fragile recovery in China’s growth, as consumer confidence is hovering near a record low after home prices plunged and the unemployment rate among young people soared.

Government spending has remained a drag on growth so far this year, according to UBS Group. It contracted by an amount equal to 0.4 per cent of the economy in the first half as local governments, facing falling revenue and more curbs on the debt levels of their financial vehicles, slashed expenditures and increased their arrears to companies, UBS said. The government report endorsed at the legislative National People’s Congress in March had called for as much as a 1 per cent expansion in annual fiscal spending.