Stock market rallies as government signals stimulus

By DU Meng, LIU Chenguang, SUN Yizhen

China’s stock market had its best month this year as the government promised strong measures to support the economy. The Shanghai Composite Index climbed 4 percent in the last week of July, recording a monthly gain of 2.8 percent. Shenzhen rose 1.4 percent. Trading volumes and purchases from overseas are both at recent highs. The Hang Seng Index also rallied in the last week of July.

The stimulus package is ready for delivery

China’s 6.3-percent GDP growth in Q2 fell short of market expectations and the government has since sent clear signals that a stimulus is on the way. Analysts expect real estate and banks to bounce back first and strongest, followed by commodities and manufacturing.

Investors have good reasons to believe the government will follow through on its promises given the density of policy announcements.

A 31-point plan was published on July 19 to support the private sector. A few days later, the politburo, the country’s top decision-making body, said it would focus on expanding demand, boosting confidence, and managing risks.

The central bank cut key interest rates in July, and throughout the month, various government agencies urged cities and banks to help the real-estate sector.

Optimistic long-term outlook

On Monday, measures were announced to stimulate consumer spending, which makes up over 70 percent of GDP.

Consumer spending has been weakening after a strong start to 2023. In terms of manufacturing, the Purchasing Managers’ Index (PMI) recorded 49.3 percent in July, so the manufacturing sector is still contracting and has been since April.

Stronger consumer demand and targeted industry policies will stimulate manufacturing and increase profits. Lower interest rates will also boost valuation.

Analysts hope that solid short-term gains and a more optimistic long-term outlook will improve investor confidence and sustain the stock market rally.

Safe, steady returns

Many risk factors have already been priced in and the market will respond well to a new round of stimulus. When asked about which companies or industries to invest in, almost all analysts point to Zhongtegu, relatively cheap, state-backed companies with reliable dividends and policy support - safe and steady returns.

Agriculture is seen as important amid looming global food shortages. EV makers are still worth following. The government has issued many car purchase incentives.

Foreign banks are generally bullish about China’s stock market. With lower interest rates and a supportive housing policy, Goldman Sachs expects stocks to bounce back in H2.