China stimulus likely to be ‘modest’ in no major boost for market, but earnings will surprise, Cambridge Associates says

Investors can expect an earnings upside in the second half following a series of easing measures and a recovering economy, said officials at investment firm Cambridge

Broad stimulus such as interest rate cuts unlikely in the near term, as the massive local government debt burden and rising US Fed interest rates pose hurdles

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A general view of a construction site in front of Chaoyang Railway Station in Beijing, China. Photo: EPA-EFE

Published: 7:00am, 9 Jun 2023Updated: 3:10pm, 9 Jun 2023

China’s widely expected stimulus package will be “modest” and unlikely to trigger a monster stocks rally, but investors can expect an earnings upside in the second half as the economic recovery is still intact, said senior officials at Cambridge Associates, a US investment firm which has over US$548 billion in assets under management.

Beijing is likely to roll out targeted measures to put a floor under the struggling property sector, said Aaron Costello, Regional Head for Asia at Cambridge Associates. But broad stimulus such as interest rate cuts will not happen any time soon, as the massive local government debt burden and the rising US Fed interest rate trajectory leaves little room for easing, he said.

“I don’t expect the Chinese government to come out and pump in tremendous amounts of money into the real estate sector now,” Costello said in an interview with the Post. “From a big picture standpoint, it will be quite modest. ”

China’s local government debt has doubled over the past five years to about 66 trillion yuan (US$9.3 trillion), the International Monetary Fund estimated, accounting for over half of the country’s annual economic output. Meanwhile, the highly leveraged property developers are also struggling to repay debt in a timely manner as borrowing avenues are limited and housing sales have slumped.

The Bund Bull in Shanghai, China, on Tuesday, Feb. 28, 2023. After three years of turbulence under the Covid pandemic, China’s leaders are expected to lay out economic goals to get growth back on track, restore confidence and avoid a build-up of financial risks. Photo: Bloomberg

Besides, the US Fed is likely to keep interest rates at elevated levels, which means a rate cut in China will put additional pressure on the yuan, Costello added.