Chinese stocks close higher on government stimulus signal

Chinese stocks closed solidly higher on Tuesday after the government signalled it would shift to a looser fiscal policy to shield the world’s second-largest economy from the worsening trade row with Washington.

After more than a year of pushing a crackdown on dangerous debt levels in the financial system, Premier Li Keqiang said the government’s “fiscal policy should be more active”, according to an announcement late Monday by the State Council, or Cabinet.

Analysts said the comments marked the beginning of a widely anticipated swing away from austerity and credit de-leveraging and toward stimulus.

“De-leveraging is still a mid-to-long-term focus, but now China has to compromise because the de-leveraging process in the past half year was rather heavy and caused lots of risks,” Citic Securities analyst Zhang Qun said.

“The economy is under downward pressure and with the external impacts, the policy has to compromise.”

Chinese policy-makers were already juggling competing priorities: transitioning the world’s second-largest economy to an expected era of slower growth, while carrying out a disruptive clean-up of its shadowy financial system.

That balancing act has become even more tricky since President Donald Trump imposed tariffs on billions of dollars of Chinese goods to punish Beijing for “unfair” trade practices.

In its announcement, the State Council said it needed to act in the face of “external uncertainties” to keep economic growth in a “reasonable range”.

Important signal
Li stressed the government would also accelerate plans to reduce taxes by more than 1.1 trillion yuan ($160 billion) and to issue 1.35 trillion yuan in local government special bonds for infrastructure.

The benchmark Shanghai Composite Index closed 1.61 percent higher, or 46.02 points, at 2,905.56 on turnover of 228.7 billion yuan ($33.7 billion).

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, gained 1.51 percent, or 24.15 points, to 1,625.84 on turnover of 264.2 billion yuan.

Zhang called the government’s announcement a “very important signal” that could herald a stocks rebound.

The yuan, however, weakened slightly, moving past 6.81 to the dollar.

The yuan has fallen to its lowest levels in a year due to the trade uncertainty and expectations of fiscal stimulus, which tend to increase money supply and weaken a nation’s currency.

The State Council said China would “avoid strong stimulus” while vowing to maintain a close eye on financial system irregularities.

The message was “loud and clear”, global investment bank Nomura said in a research note.

“We expect Beijing to ratchet up fiscal stimulus and credit easing in coming months,” it said.

The United States earlier this month imposed 25 percent tariffs on $34 billion of Chinese products, drawing a tit-for-tat response from Beijing.

Washington has since threatened tariffs on another $200 billion in Chinese exports.

Trump last week accused Beijing of pushing the yuan lower to shield its Chinese exporters.

Oil shares rallied in Shanghai, with PetroChina climbing 1.47 percent to 7.57 yuan, while Sinopec gained 1.40 percent to 6.52 yuan.

Banking giant ICBC edged up 0.18 percent to 5.61 yuan while Bank of China added 0.28 percent to 3.60 yuan.