China's Stimulus Shortfall Disappoints Investors, Fueling Market Volatility

China's highly anticipated Finance Ministry briefing on Saturday failed to deliver the fiscal stimulus that equity investors had hoped for, indicating that the volatility gripping the market following a world-beating rally is likely to continue. While the ministry promised more support for the struggling property sector and hinted at greater government borrowing, the briefing lacked the headline dollar figure for fresh stimulus that the markets had sought.

Investors Crave Bolder Fiscal Measures to Sustain Market Rally

Piecemeal Approach Disappoints Investors

Patience has been wearing thin among investors, who have been clamoring for Beijing to announce big-bang fiscal measures to help sustain the rally sparked by the stimulus blitz that authorities unleashed in late September. The CSI 300 Index, a benchmark of onshore equities, capped its biggest weekly loss since late July on Friday, with volatility rising ahead of the Ministry of Finance briefing. The market has been caught in a start-stop cycle of gains and losses a few times before as Beijing's piecemeal approach to stimulus produced only brief rebounds.

Lack of Consumption Incentives Adds to Investor Concerns

The Finance Ministry's briefing also failed to produce new incentives to boost consumption, which has been a weak link in the Chinese economy. This is another reason why traders may feel disappointed, as they had hoped for measures to address this critical aspect of the economic recovery.

Investors Seek Clarity on Fiscal Stimulus Plans

Prior to the weekend, investors and analysts surveyed by Bloomberg had expected China to deploy as much as 2 trillion yuan ($283 billion) in fresh fiscal stimulus on Saturday, including potential subsidies, consumption vouchers, and financial support for families with children. The ministry's use of phrases like "relatively large amount, or relatively large room" to describe the measures has left investors waiting for more details.

Inflation Data Adds to Investor Concerns

Inflation data released on Sunday is likely to add to investor concerns. It showed that China's consumer prices rose less than forecast in September, while factory-gate charges fell for a 24th straight month, underscoring the need for further policy support to help the economy break out of deflation.

Investors Shift Focus to Upcoming Policy Briefings

Investors will soon turn their attention to the next major policy briefing in the coming weeks — from the Communist Party-controlled parliament that oversees the budget — for details of more stimulus. At its October meeting last year, the Standing Committee of the National People's Congress approved additional sovereign debt and raised the budget-deficit ratio.

Potential Impact on China's Bonds

A strengthened fiscal push would likely weigh on China's bonds by encouraging traders to move funds into riskier investments with potentially better returns. An increased supply of debt may also sap liquidity in the financial system, making it harder for the market to absorb the entire amount. Analysts expect the yield curve to move lower, given debt issuance this year may come below market consensus.