After the Standing Committee of China’s top legislative body, the National People’s Congress (NPC), revealed details of its next round of fiscal support measures last Friday, Mark Haefele, chief investment officer at UBS Global Wealth Management discusses the impact and asset allocation.

The National People’s Congress (NPC) has revealed details of its next round of fiscal support measures after a week-long meeting, with the focus on addressing hidden debt risks that continue to strain its local governments.  The move comes as the country battles with a slowing economy and property woes.

In a press event, the NPC announced a 10 trillion renminbi ($1.38 trillion) local government debt resolution plan over multiple years, including a 6 trillion renminbi increase in the local government debt quota over the next three years.

Finance Minister Lan Fo’an said the plan will reduce these hidden debt piles from an estimated 14.3 trillion renminbi at present to 2.3 trillion renminbi by 2028. The package will also reduce the interest burden by about 600 billion renminbi over the next five years to defuse medium-term systemic risks, repay corporate and civil servant arrears and, in turn, free up local resources to support growth indirectly.

However, the meeting did not deliver any new borrowing or spending measures to boost consumption, destock housing inventories, or recapitalise the banks, despite previous fiscal pledges. That falls well short of market expectations, especially considering the increasing likelihood of a “red sweep” in the US after Donald Trump was elected to the White House for a second time. The Hang Seng index fell 2 per cent on Monday morning.

Mark Haefele, chief investment officer at Switzerland's UBS Global Wealth Management highlighted how Beijing appears to want more clarity on Trump’s tariffs before additional stimulus. Despite the stimulus letdown, forward guidance from the NPC Standing Committee suggests that previously announced measures and a multiyear fiscal expansion are still being drawn up.

Attempts by China to revive the pace of its economic growth and tackle areas such as heavily indebted real estate has been one of the uncertainties investors have had to deal with. And the prospect of Donald Trump in the White House next January, and enacting tariff hikes, adds further concerns to what impact this will have on China and other countries. Since the start of January, The Shanghai Composite Index (SSE) has risen 16.1 per cent since the start of January. The MSCI World Index rose 19.5 per cent over the same period. 

Lan Fo’an vowed more forceful fiscal policy in 2025, highlighting Beijing’s focus on raising the deficit, expanding the scale and usage of special local government bonds, issuing ultra-long special treasury bonds for strategic areas, supporting consumer goods and equipment trade-in programmes, and increasing central transfers to local governments. Some of these plans are likely to be decided in the December Central Economic Work Conference (CEWC) and announced at the NPC meeting in March 2025.

In Haefele’s view, the deferral of fiscal stimulus indicates that top leaders are opting to preserve their policy options until Trump’s tariff strategy becomes clearer. This also means that China is prepared to respond to higher tariffs with greater policy support, though measures are likely to be reactive rather than pre-emptive.

Haefele thinks that Chinese equities look susceptible to tariff-induced volatility and stimulus disappointments. While the headline 10 trillion renminbi local government debt plan did meet expectations on its total size, market expectations prior to the meeting had converged around not only a large-scale local government debt resolution programme, but also some form of additional consumption and property stimulus. With the US election resulting in a victory for Trump and China’s stimulus response lagging expectations so far, Haefele sees potential for near-term pressure on Chinese equities following a near 25 per cent rally since mid-September. “Tariff-induced volatility, further stimulus disappointments, and higher US inflation are all downside risks that could hurt Chinese earnings and multiples,” he said in a note on Monday.

Defensive positioning is preferred within China
Given near-term risks and volatility, Haefele has tilted his barbell strategy within Chinese equities back toward defensive and high-yielding value sectors in the near term, such as financials, utilities, energy, and telecoms. Domestically-oriented, these should outperform in a volatile environment while also benefiting from greater policy stimulus. “Growth sectors are more susceptible to stimulus disappointments and near-term US policy uncertainty,” he added. For China investment grade bonds, he sees minimal impact on state-owned enterprises and financials, and believes that China investment grade (IG) fundamentals remain broadly sound.

Haefele remains neutral on Chinese equities, and would consider a more positive view if the market falls sharply, as tariffs are priced in and stimulus begins to meet or exceed expectations. He also sees an outsized correction in Chinese internet stocks as a buying opportunity given their undemanding valuations, solid growth prospects, and decent shareholder returns.

Another viewpoint
Meanwhile, Paris-based Edmond de Rothschild believes that China's economy offers a note of optimism, but finds Beijing’s stimulus measures disappointing as their impact is unlikely to solve the country’s structural problems. Due to the rising dollar and negative prospects for global exports, after Trump’s victory, the firm has decided to raise exposure to US equities, maintain its positive take on Chinese equities and reduce emerging country equities. The overall position on equities and fixed income is unchanged at neutral. Edmond de Rothschild still likes investment grade and emerging country credit. The outlook in Europe has also been weakened by the threat from the US to its exports, the firm added on Monday this week.