China sentiment improves amid stimulus talk, but Morgan Stanley still cautious

Investing.com– Sentiment towards Chinese stock markets had improved in recent signals after the government provided more verbal signals on stimulus, although Morgan Stanley (NYSE:MS) recommended seeking more clarity on policy execution.

MS analysts said that while market sentiment would improve in the near-term, long-term sustainability “hinges on policy details and execution.” 

“We recommend exercising caution until clarity emerges on policy follow-through,” MS analysts said in  a note. 

Chinese stocks rallied sharply at the beginning of the week after China’s Politburo signaled its commitment to unlocking more aggressive stimulus measures. 

But they largely reversed course by Friday, with the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes set for muted weekly performances after China’s Central Economic Work Conference- a top-level meeting of officials- did not offer any more insight into the planned stimulus measures. 

MS recommended adopting a cautious stance towards the country until more clarity emerged on Beijing’s plans to follow through on its stimulus promises. 

The investment bank warned that pressure on Chinese company earnings, a weakening yuan, expectations of a more hawkish U.S. stance towards China and the prospect of a renewed trade war all remained major risks for local markets. 

The biggest headwind for Chinese stocks going into 2025 is the prospect of increased U.S. trade tariffs under President Donald Trump. China is likely to retaliate with its own measures, pressuring global trade. 

Beijing is expected to unlock even more stimulus to bolster the economy against increased trade headwinds, and could be delaying announcing more stimulus measures until Trump’s policy agenda becomes more clear.