More stimulus likely to shore up H2 growth

Additional policy stimulus measures are likely in the second half to anchor China's economic growth and reinforce the ongoing recovery of the A-share market, international investment banks said as markets await a potential regular top-level meeting to set the macroeconomic policy tone for the coming months.

They increasingly see the meeting as a potential window for policymakers to fine-tune macroeconomic policies, with a possible shift toward policy easing resembling the adjustments introduced in late 2024, which helped trigger a rally in China's equity market, although any policy response this time is likely to be more measured and phased.

Song Yu, chief China economist at UBS Securities, said that while the first-quarter growth of 5 percent surprised on the upside, weakness in consumption and investment has dragged down second-quarter growth — which came in at 4.3 percent year-on-year and below the annual target range of 4.5 to 5 percent — which likely necessitates additional policy support.

The room to act is ample, Song said, adding that subdued consumer inflation leaves scope for further cuts to interest rates and the reserve requirement ratio, while fiscal policy could become more supportive through faster government bond issuances and possible adjustments to the annual issuance quota.

Notably, "the policy response in the coming months is likely to be qualitatively similar to the easing measures introduced in September 2024", Song said, when the government rolled out broad-based stimulus moves following a slowdown in economic growth and a capital market slump, although UBS expects the scale of easing to be more measured and moderate this time.

Even under that assumption, he added, both the economy and financial markets should improve in the second half, while a repeat of the 2024 package would be "a positive surprise".

China's A-share market rebounded on Tuesday amid policy support, including stock purchases by State-owned investment companies and listed enterprises. The benchmark Shanghai Composite Index closed up 1.79 percent at 3,864.37 points, while the tech-heavy STAR 50 Index surged by 10.73 percent, after a slump last week amid a global tech stock correction.

Potential macro policy easing can help sustain investor sentiment, said Shan Hui, chief China economist at Goldman Sachs, who expects a regular top-level mid-year meeting focusing on economic issues to adopt a more supportive policy stance.

Shan said the current backdrop bears some resemblance to mid-2024 given the recent economic slowdown, capital market fluctuations and pressures on local government finances, yet the challenges are less pronounced than two years ago.

This time, policymakers are likely to deliver a more gradual and moderate policy response than in 2024, with investment likely to serve as a key lever to support growth in the second half, she added.

Zhu Feng, China chief economist at JPMorgan, said infrastructure investments with clear links to demand — including urban renewal, affordable housing-related infrastructure, logistics, power grids, water conservancy, digital infrastructure and public services — may become a "strong focus for policy".

China has signaled a more supportive policy tone, as it was stressed at a high-level symposium last week that countercyclical adjustments should be intensified while incremental policies should be studied and prepared in advance to consolidate the steady and improving economic performance.

Beyond monetary and fiscal easing, Song from UBS said that restoring confidence will require improvements to the incentive system so that businesses and local governments become more willing to take reasonable risks. Excessive risk aversion — partly shaped by regulatory uncertainties — could hamper the effects of easing moves such as interest rate cuts.