As investors await concrete signs of progress on US-China trade talks, several loosening signals from China have helped to support market sentiment. China’s 10-year government bond yield rallied by around 10 basis points in the last few weeks following a sharp sell-off that began in September, while Chinese equities were broadly stable. On November 5, for the first time since early 2016, China’s central bank lowered a key quasi-policy rate, the one-year medium-term lending facility (MLF) rate, by 5 basis points. This was followed by a 5-basis-point reduction in both the seven-day reverse repo rate and the new benchmark loan prime rate (LPR) based on the MLF rate on November 18 and 20 respectively. While the magnitude of the rate cuts is small, they helped to ease market concerns that the People’s Bank of China is constrained from delivering further monetary stimulus as China’s consumer price index rose above the government’s 3 per cent year-over-year target. The more dovish policy shift was also underscored by the recently released third-quarter monetary policy report. In the report, the central bank acknowledged that the Chinese economy is facing stiffer growth headwinds, reiterated its policy focus on maintaining stability and de-emphasised the need to keep money supply under control. Echoing a more supportive policy stance on the fiscal side, last week, China brought forward 1 trillion yuan (US$142 billion) of its 2020 local government special bonds quota to this year. The finance ministry urged early issuance and use of the bonds, which would help fund infrastructure projects. In the past few weeks, Chinese policymakers seem to have stepped up their efforts to stabilise the economy as a disappointing set of major activity indicators for October pointed to further slowdown in China’s growth momentum. While we are likely to see more monetary and fiscal easing measures in the coming quarters, a substantial ramp-up of policy stimulus in 2020 still seems unlikely. How will China balance the need for stimulus with curbing debt? Since the shift to a more accommodative policy stance around mid-2018, policy easing so far has been milder than prior easing cycles in 2008-09 and 2015-16. On the monetary policy side, the PBOC has relied more on required reserve ratio cuts this time around, while making smaller reductions in the benchmark lending rate. Given weak monetary policy transmission, the injection of liquidity from the cuts in the required reserve ratio has led only to a muted easing of financial conditions as banks’ effective lending rate was only reduced slightly. On the fiscal side, the large increase in the issuance of local government special bonds this year seems to have failed to lift infrastructure investment growth meaningfully. Moreover, extensive loosening of property market policies, which were a big part of the stimulus package during previous easing cycles, has also been notably absent this time. The more modest policy easing in part reflects Chinese policymakers’ current approach of providing only the minimum necessary amount of policy support. They seem to be concerned about the effect of short-term stimulus on the overall leverage in the economy. At the same time, China’s labour and property markets have held up relatively well this year, which reduced the incentive for policymakers to roll out more aggressive easing measures. More good news for China’s economy as services sector rises Looking ahead into 2020, this seems unlikely to change. On balance, the chances are good that the United States and China will reach a “phase one” deal – a narrow trade agreement to stem further US tariff increases in exchange for a commitment from China to increase agricultural purchases . If such a deal is struck and there is no further escalation of US-China trade tensions, the drag on China’s exports will probably ease through 2020. Domestic business and consumer sentiment will also improve slightly, although trade-related uncertainty is likely to remain elevated in the short term. More recently, US economic activity data has been surprisingly positive, while the downward trend in the euro zone data seems to have stopped, even though growth remains very sluggish. China’s November official and Caixin purchasing manufacturing managers’ index both came in better than expected , pointing to some tentative signs of stabilisation. With a US-China trade detente and a bottoming out of the global industrial cycle, we are likely to see a shallow recovery in China’s growth momentum through 2020. Unless the trade talks break down with a significant escalation of tariffs and tech restrictions by the US, the likelihood of China’s rolling out a large-scale easing package, like the ones in 2008-09 and 2015-16, seems low. In an environment of modest growth recovery and moderate policy support, upside to Chinese equities in 2020 is likely to be capped by soft earnings and limited room for valuation expansion. Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management