China's stock market recorded a strong start to the new week, with impressive gains ahead of global markets. The main driver comes from changes in the government's monetary policy. Instead of maintaining a “cautious” stance, China has changed to adopting a “relatively loose” monetary policy. The news helped Hong Kong's Hang Seng index rise nearly 6% on Monday, although the gain was only enough to bring the index back to its average price level from a month ago.
Policy Leverage Inflation Data
The decision to change policy was driven by newly released inflation data. Therefore, China's consumer price index (CPI) increased only 0.2% over the same period last year, well below expectations of 0.4%. This indicates that price pressure in the economy is still very low, creating conditions for the implementation of growth support measures.
In addition, the producer price index (PPI) decreased by 2.5%, lower than the previous month's decrease of 2.9%, just as expected by the market. However, PPI remains in negative territory, suggesting that the current stimulus measures are not strong enough to create a sustainable recovery in the manufacturing industry.
Effect on Renminbi Exchange Rate
Loose monetary policy is often accompanied by downward pressure on the Chinese Yuan (CNY). However, the USDCNH rate dipped slightly below the 7.29 mark on Monday, after hovering near 7.30 last week. This is the highest level since November 2023.
Although the Chinese government is trying to maintain currency stability through intervention measures, experts say that these solutions are only short-term. Unless economic fundamentals improve, the Yuan will continue to experience downward pressure in the long term.
Expectations of the future
The market expects new economic stimulus packages to accompany a move to an easing policy to boost growth. However, if measures are not implemented decisively, downward pressure on the recession could increase, having a negative impact on financial markets.
However, with policy changes and positive economic data, many investors believe that the Chinese economy is on the way to a stronger recovery period in 2025.
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