Will the Chinese Stock Market Rebound in Q2? Focus on Additional Stimulus Measures

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Junho] As the Chinese government attempts to achieve both its 'Zero COVID' prevention policy and its 'annual 5.5% growth target,' the likelihood of additional economic stimulus measures being introduced in the second quarter of this year has increased. In the securities industry, there are opinions that the bottom of the Chinese stock market could be formed this month depending on the additional stimulus measures.

Kim Kyunghwan, a researcher at Hana Financial Investment, stated in a weekly market strategy report, "We believe that the second round of economic stimulus measures will begin in the second quarter of this year," adding, "Since the effects of the first round of stimulus measures (fiscal, monetary, real estate) since the end of last year have been offset by lockdown shocks and a cooling real estate market, we expect the intensity and speed of policies to level up around the Politburo meeting (economic theme) at the end of April."

Hana Financial Investment views factors that could constrain additional stimulus measures, such as the narrowing or inversion of the US-China interest rate differential and inflationary pressures in China, as unlikely to have a significant impact. Firstly, the stability of the yuan exchange rate is expected to buffer financial market shocks caused by changes in the interest rate differential. Since March, the nominal interest rates (10-year government bonds) of both the US and China have likely partially reflected their respective monetary policy directions. Additionally, the difference in real interest rates between the US and China, calculated by subtracting the Consumer Price Index (CPI), remains high. Since 2020, the widening real interest rate gap between the US and China has been clearly linked to the strengthening of the yuan exchange rate. In particular, the Chinese government's monetary and fiscal policies are highly focused on improving weak demand. The rise in the Producer Price Index (PPI) has been controlled as much as possible through last year's decarbonization efforts, relaxation of controls on energy-intensive industries, and strengthened administrative measures. The stimulus measures are concentrating more on the demand weakness issue, where the PPI increase is not passed on to the CPI at all.

Researcher Kim said, "Considering the effects of the second round of stimulus measures, we believe the annual growth rate bottom will still be in the first quarter, and the first bottom of corporate profits will form in March-April," adding, "We expect significant differences in the timing of rebounds across industries." He continued, "In the second quarter of this year, as external sensitivity decreases, the focus will shift to confirming whether corporate profits have truly bottomed and verifying the reliability of estimates. Chinese corporate profits are expected to have limited V-shaped rebounds amid lockdowns, commodity price headwinds, and stimulus measures in the second quarter, but attention should first be paid to confirming the first bottom in March-April and the possibility of differentiated recovery by industry."

This content was produced with the assistance of AI translation services.