As Chinese bourses record historic daily gains, with the Shanghai Composite Index up more than 8 percent and moving above the 3,300-point level, policymakers in China will likely take bolder moves than expected to bolster the world's second-largest economy in the following months, analysts said on Monday.
More tools are expected to come into play, including further stimulus packages, the issuance of additional central government bonds, and more easing in the housing sector.
Although weaker-than-expected data in recent months suggests that China's GDP growth is likely to have decelerated in the third quarter, analysts believe China is still able to achieve its annual growth target of around 5 percent this year, given recently announced supportive policies and the incremental policies that are soon to be introduced.
Their comments followed another robust rally day on Monday. That came after a strong rebound in the A-share market last week that was propelled by higher market liquidity and the recovery of investors' risk appetite amid the latest support measures.
On Monday, the Shenzhen Component Index spiked 10.67 percent, while the technologyfocused ChiNext in Shenzhen surged 15.36 percent. The combined trading value at the Shanghai and Shenzhen exchanges hit an all-time high of about 2.6 trillion yuan ($371 billion).
Thomas Fang, head of China global markets at UBS, said that markets reacted positively and immediately after the Political Bureau of the Communist Party of China Central Committee and the financial regulatory authorities issued a series of favorable policies last week.
"Driven by the recent strong policy signals, market expectations have been rectified decisively, and investor confidence restored significantly," Fang said. "The key next steps to watch will be any material improvement of macro data and companies' financials. In addition to the implementation of the announced policies, it will be critical to further introduce followthrough measures and continue to deliver consistent policy signals."
Fang said the stimulus fiscal policies are essential to solidifying confidence and boosting muchneeded consumption. "Robust support and protection for private enterprises and entrepreneurs is what the market is hoping for. Policymakers should send firm and consistent signals to the market in the manner that is most receptive to the market."
Data from the National Bureau of Statistics showed on Monday that China's official purchasing managers index for the manufacturing sector rose slightly from 49.1 in August to 49.8 in September, just below the 50-point mark that separates contraction from expansion.
Zhou Maohua, a researcher at China Everbright Bank, said that September's manufacturing uptick came with a modest recovery in domestic demand and resilience in external demand, as well as with policies taking effect that are aimed at driving equipment upgrades and consumer trade-in deals for consumer goods.
Meanwhile, Zhou noted that China's manufacturing sector is still grappling with pressing challenges from lukewarm demand and the high operational pressures that companies are facing.
Citing China's weaker-than-expected economic indicators in July and August, Betty Wang, lead economist at British think tank Oxford Economics, said that China's growth "has likely weakened on a sequential basis in the third quarter, translating into 4.6 percent year-on-year growth, a notch lower than the 4.7 percent rise in the second quarter".
Following the latest stimulus package announced by the People's Bank of China, the country's central bank, Wang said her team expects that the PBOC will cut the reserve requirement ratio by an additional 50 basis points in the fourth quarter, followed by another 20 basis point rate cut to the seven-day reverse repo rate in the first quarter of next year to lower funding costs in the economy.
"We believe the economy needs a consistent policy stance in the future and policy coordination from the fiscal side," Wang said. "The housing market remains in weak shape. … Additional funding and supply-side measures to destock housing inventories are still needed to stabilize the sector."
Chang Haizhong, executive director of corporates at rating agency Fitch Bohua, said further incremental fiscal policies will soon be rolled out to accelerate the economy, including the issuance of additional government bonds or special treasury bonds.
"Given the supportive macroeconomic policies that are either already in place or soon to be introduced, we believe it is still possible for China to achieve the annual growth target this year," Chang added. "The key focus should be placed on stabilizing housing sales and prices, providing subsidies to low-income groups, as well as stimulating effective demand and boosting consumption by either increasing subsidy levels or expanding the range of subsidized goods."
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