In the previous year, it was anticipated that the Chinese authorities would implement decisive measures to catalyze a substantial economic revival. Nevertheless, the government has refrained from any major interventions, and no significant shifts are expected in the foreseeable future.
The Third Plenum, historically a platform for significant policy announcements by Chinese Communist Party leaders every five years, has concluded without the anticipated major policy shifts. Previous Third Plenums have announced the opening of the Chinese economy in the late 1970s and more recently the end of the one child policy. Despite hopes for bold steps to boost the real estate sector and the economy, recent signals continue to suggest the government’s reluctance to implement short-term stimulus measures.
The People’s Bank of China cut the 7-day reverse repo rate on Monday, a slight adjustment which markets had largely anticipated. Then on Thursday, the central bank unexpectedly decreased the medium-term lending facility rate. These actions aim to sustain the government’s target of 5% yearly GDP growth, following a drop to 4.7% in the second quarter.
The Chinese authorities deliberately avoid extreme actions that might stimulate immediate economic growth but fail to ensure sustained development. The government is trying to balance preventing a significant economic downturn while avoiding excessive stimulus measures so the economy can gradually shift away from its heavy reliance on the property market, which was once a major growth driver. While challenges may persist for China’s economy in the short run, its stock market valuation (with an MSCI China P/E of 11.67 versus the S&P 500’s 28.63) will appeal to long-term investors.
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
