China: more stimulus signals from CEWC

01. What has happened?

China has just concluded its Central Economic Work Conference (CEWC, December 11-12). This is a high-level annual meeting for policymakers to evaluate the current economic situation and lay out guidance for the following year.

The CEWC this year prioritized a vigorous consumption boost and overall expansion of domestic demand. This conference followed the change in tone evident in the previous Politburo meeting. China’s monetary policy stance will be ‘moderately loose’, a change from the ‘prudent’ description in place since 2011. Fiscal policy will be ‘more proactive’, for the first time since the pandemic. There was also a first mention of the intensification of unconventional countercyclical adjustments. The CEWC statement also calls for property sector and stock market stabilization. The CEWC for the first time called for ministerial coordination to ensure consistency in economic and non-economic policies.

Chinese authorities are set to roll out a nationwide private pension scheme this Sunday. The contribution under the new retirement savings scheme is likely to be eligible for tax deductions and boost demand for onshore equities. However, investor response to the pilot phase of the scheme launched in select cities has been muted due to low equity market returns.

On the macro side, recent data releases have yet to show full effects of ongoing stimulus measures on the Chinese economy. Deflation risks linger as China’s inflation declined to +0.2% YoY in November, falling short of expected +0.5%. PPI deflation remained in November at -2.5% YoY, with negative rates now persisting for more than two years. On the other hand, manufacturing PMI has shown signs of moderate recovery for two consecutive months, rising to 50.3 in November from 50.1 in October. Exports continued to grow at 6.7% YoY in November, while imports declined -3.9% YoY. Front-loaded orders amid tariff concerns boosted exports growth, while imports fell against a background of weak domestic demand. 

02. How did markets react? 

Markets had risen during the week in anticipation of the CEWC announcements but gave up all gains due to the lack of concrete demand-supporting fiscal measures. As of writing at 4.30pm Hong Kong Time, the Hang Seng Index had declined 2.1% and Hang Seng Tech Index had declined 2.6%. The Shanghai Composite Index was down 2.0%, and the Shenzhen Composite Index was down 2.0%. USD/CNY had depreciated slightly by 0.17% at 7.28 at the time of writing.

03. What does it mean for investors?

Supporting consumption and raising investment efficiency were highlighted as the top priorities in the CEWC. In the face of external tariff uncertainty next year, stronger domestic recovery could provide more resilience to the broader economy. We believe more fiscal stimulus measures could be implemented next year in these two areas. Firstly, the trade-in subsidy for consumer goods could continue and might be expanded in case of any renewed slowdown in retail sales growth. Pension, childcare and healthcare support could be enhanced to relieve household financial burdens and encourage consumption. Secondly, the new equipment subsidy for manufacturing upgrading could be expanded, particularly in industrial areas with high automation potential.

Technology innovation and structural reforms were among the other priorities in the CEWC. R&D investments to pursue technology self-reliance could be a focus area, particularly given the possibility of more technological sanctions from the U.S. next year. On the structural reforms side, better protection of private sector development, reforms of state-owned companies, and building a more unified national market could all be in focus, in line with the high-level guidance from the Third Plenum this year.

The CEWC explicitly aimed to increase the fiscal deficit ceiling, raise debt issuance and further ease monetary policy to maintain ‘a stable growth rate’ and ‘overall stability in employment and prices’ in 2025. However, there were no concrete measures, particularly on consumption and housing. As a result, market reaction to the pro-growth fiscal signals was lukewarm. But we think more detailed policy measures are likely to be announced following the NPC meeting (March 5-11), especially in response to any possible tariff hikes by the U.S. Meanwhile, investor sentiment around the U.S.-China relationship will continue to drive market volatility.

With likely stronger stimulus next year, as outlined by the CEWC, we continue to highlight selective investment opportunities in Chinese equities. We favour the sectors with likely stronger policy support, including technology, consumer discretionary and green growth areas.