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Investors in China are calling for more stimulus

Investors in China seemed content with existing government measures to support the country’s slumping economy. But they are now calling for more stimulus.

Judging by the lack of conviction in Chinese financial markets, the outcome of this month’s key policy meetings may be the deciding factor for investors. While volatility in stocks and the yuan has eased on expectations Beijing will ensure stability ahead of the 22 May start date, traders have so far been reluctant to go big on risk.

Stock valuations are being capped by slumping corporate profits, which are unlikely to recover any time soon from their worst first quarter since at least 2003. Signs of fading momentum can be seen in languishing stock turnover and the CSI 300 Index’s torpor: the benchmark has not moved more than 2% in either direction for 22 consecutive trading days. It closed completely flat on Tuesday (12 May).

Beijing has already hinted at more support, with the central bank on Sunday vowing to deploy stronger policies. But the lack of specifics – and the muted reaction in markets this week (ending 15 May) – suggests concrete stimulus measures may be the only catalyst that investors can count on to break the grind.

Some retail traders are positioning for a rebound; last week they boosted stock leverage by the most in two months. Still, that is far below this year’s peak of CNY1.1t (USD155b) in March. Daily stock turnover is less than half what it was only a few months ago.

The CSI 300 Index is trading at almost 12 times projected earnings, recovering from its late-March multiple of about 10 times. Investors may have little to fall back on after the combined income of Chinese non-financial firms fell by more than 50% in the first quarter. Analysts have warned of more pain ahead for corporate earnings amid a slump in global demand.

Foreign investors, who in April resumed their purchases of yuan-denominated shares, are also less sanguine about the market. While they have continued to buy in May, the pace of net purchases has slowed to about 40% of the daily average in April.

Those looking for shelter might not get it from China’s government bond market, which is under pressure from this month’s surge in issuance from local authorities. A selloff in China’s sovereign notes accelerated this week, with benchmark 10-year yields surging to a seven-week high. Holders of the notes are likely switching to the newly issued local government bonds for better returns.

The Shanghai Composite Index dipped 0.11% to 2,891.56 on Tuesday while the Hang Seng Index lost 1.45% to 24,245.68.

REST OF ASIA

New Zealand equity investors are among the most positive in the region as Kiwis begin to exit from one of the world’s strictest coronavirus lockdowns.

The nation’s stock market is the second-best performer in the Asia Pacific since global benchmarks plunged to their March lows. A fading infection count and moves to unwind virus restrictions have helped the market recover about 27% from its trough, trailing only South Korea’s 33% improvement.

The benchmark’s path forward remains hazy as New Zealand this week (ending 15 May) began relaxing restrictions after employing an elimination strategy to halt the virus spread. A lack of earnings clarity and reignited geopolitical tensions has made it hard to assess the outlook for the S&P/NZX 50 Gross Index.

The phased exit from lockdown, which will allow retailers and other businesses to open, comes as job losses mount and the economy enters a slump. New Zealand is expected to suffer a record contraction in the June quarter and the unemployment rate is projected to rise into double digits.

Australia’s S&P/ASX 200 Index was 0.60% lower to 5,370.60 in early-Wednesday (13 May) trading, extending Tuesday’s 1.07% loss to 5,403.05.

South Korea’s Kospi Index opened 1.05% down to 1,901.94 on Wednesday after falling 0.68% to 1,922.17 the previous session.The Taiwan Stock Exchange Weighted Index declined 1.21% to 10,879.47.

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