China's Stimulus Rally: Will It Last?

China's stock market has surged over 25% in a nine-day winning streak, fueled by Beijing's recent announcements of economic support, as reported by CNBC. The CSI 300 blue-chip index popped over 8% on Monday, its best day in 16 years, before markets closed for a week-long holiday.

However, concerns have emerged following a decline in Hong Kong stocks on Thursday, ending a 6-day winning streak. This has led to questions about the sustainability of the rally.

Analysts remain divided on the longevity of the gains. Eugene Hsiao, Head of China Equity Strategy at Macquarie Capital, believes the rally could continue after the mainland markets reopen next Tuesday, as noted by CNBC. He attributes the decline in Hong Kong to "short-term profit taking" given the sharp rise the day before, and predicts that Beijing's stimulus measures coupled with increased retail investor participation will fuel a longer rally.

Shehzad Qazi of China Beige Book International, shares Hsiao's optimism, suggesting the rally could extend through the end of the year. However, he cautions of a potential "ugly reversal in sentiment" into 2025 if markets become disillusioned with the effectiveness of the stimulus measures.

Despite the bullish outlook, some analysts, such as Shaun Rein, founder of China Market Research, anticipate more volatility ahead. He predicts "1-3 weeks room left for Chinese equities to keep going up" but notes the potential for drops as investors take profits.

Ting Lu, Nomura's chief China economist, highlights increased retail investor participation, driven by a "fear of missing a seemingly once in a lifetime rally."

The rally hinges largely on expectations of more fiscal policies from Beijing. While the Ministry of Finance has yet to release major plans, reports suggest they are in the works. Nomura’s Lu encourages investors to exercise "more sober assessment" amid the recent market frenzy, acknowledging the uncertainty surrounding the scale and content of the fiscal package.

Macquarie Capital's Hsiao warns that the rally could be derailed if the fiscal stimulus package falls short of expectations. Other potential catalysts for a decline include stronger than expected U.S. job numbers, implying smaller Fed rate cuts, or a Trump victory in the November election.

China has grappled with deflationary pressures due to a prolonged real estate downturn and weak consumer confidence. Economic data in recent months has missed expectations, raising concerns about the country's ability to achieve its 5% full-year growth target.

The People's Bank of China has taken steps to stimulate the economy, including lowering the reserve requirement ratio and cutting the benchmark interest rate. However, investors are looking for more substantial fiscal support, as highlighted by Alexander Cousley, APAC investment strategist at Russell Investments, who notes that "we haven’t moved into this world where fiscal has become the dominant driver, and so that’s what we’re really looking for."

The effectiveness of future stimulus measures will be critical in determining the trajectory of the Chinese stock market. As Billy Leung, investment strategist at Global X, points out, "If policy follow-through is strong, we could see further gains, backed by a broader base of investor participation."