Investors were expecting a repeat of previous large-scale stimulus to boost Chinese growth, with beneficial spill-over for the rest of the world.
Strong market expectations of an old-style credit easing and fiscal stimulus have led to a bigger overall risk appetite in recent weeks. We believe the current market optimism about the China stimulus will be short-lived. The ongoing domestic easing cycle will be weaker than previous ones and this market expectations will not be met.
Easing is constrained by the elevated debt level and the overheated property sector. As we previously highlighted there is still room for proactive fiscal policy in H2/18. But recent policy statements, including that ordering the acceleration of local government special bond issuance are all part of the current quotas, which were announced during the NPC plenary session in March. So, it is merely a case of catching up with the fiscal plan for the full year and does not consitute additional stimulus.
Recovery of total credit growth has remained modest. China has not relaxed its macro prudential stance nor supported the housing market. Investors have since lowered their growth expectations for China.