On December 10, the Chinese stock market witnessed a significant rally followed by a pullbackThe Shanghai Composite Index opened with an impressive gain exceeding 1% and ultimately closed up by 0.6%. This positive movement in the market was largely triggered by the Chinese government's recent announcements hinting at a "moderately relaxed" monetary policy alongside a "more proactive" fiscal policy, effectively igniting interest in Chinese assets overseas.

Overnight, the rise of Chinese concept stocks significantly boosted the Nasdaq Golden Dragon China Index, which surged by 8.5%. Stocks portraying remarkable gains included BiliBili, which jumped by 21%, while Pinduoduo, JD.com, and Beike all experienced increases exceeding 10%. Notably, both Alibaba and Baidu saw their shares rise more than 7%.

As the US stock market approaches the year-end performance finish line, discussions have arisen regarding the potential for a “Christmas rally” in China, reminiscent of the bullish period often observed in Western markets during the festive season

Will Chinese investors experience their own version of this seasonal bullishness?

According to reports from overseas investment banks, trading volumes of call options on the MSCI China ETF (FXI) reached approximately 500,000 contractsHowever, the enthusiasm for investment appears to be more muted than in the past, as fund managers report that overseas investors are less aggressive in their market pursuits and express a preference for concrete data before committing their capitalThis cautious sentiment is corroborated by a Goldman Sachs report outlining a decline in overseas allocations to Hong Kong and A-shares, hitting a five-year low with a net investment allocation retreating to just 6.5%—the first percentile among the timeframe of five years.

This week, the reaction to the government's announcements was palpable, triggering substantial upward movement in Chinese assets

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The Hang Seng Index ended the day with a 2.7% gain, while the A50 Index shot up by 6%. On December 10, the Shanghai Composite Index saw a bounce back of close to 0.6%, though the Hang Seng Index ultimately closed lower from its earlier highs.

Despite the rising trading volumes of call options for Chinese stocks, the actual capital inflow from overseas investors remains subduedAs BlackRock’s chief economist for China, Song Yu, shared with reporters, overseas participants generally prefer explicit numerical data to make investment decisions and may have to wait until next year for clearer signalsHe emphasized the importance of revealing specific policies before the year-end, which would help stabilize market confidence.

Song Yu proposed that current macroeconomic policies should adopt more flexibility, suggesting that concerns over a 3% budget deficit could be overstated, and that the reserve requirement ratios do not necessarily need to be so stringent

He also argued for increased monetary policy support, recommending significant one-off rate cutsStability and predictability in regulatory policies are also essential, according to him.

David Scutt, a senior strategist at Gain Capital, commented on market trends indicating that the A50 Index experienced sharp pullbacks during the early Tuesday session near levels of 14,200-14,300. He suggested that a critical bottom level exists around 13,000, and as long as this level holds, markets may face wide-ranging fluctuations while awaiting the next uptrend opportunityA breakthrough beyond resistances might target runs toward 15,000 and previous highs of OctoberIn relation to the Hang Seng Index, the current trading level around 20,433 could serve as a reference for traders, with 21,377 as a previous peakIf this movement is coupled with rising prices and increasing volumes, it could strengthen the rationale for a bullish perspective.

Despite some optimism in the market, institutional investors remain hesitant

Uncertainty surrounding specific policy stimuli remains a significant aspect of their cautious stance, compounded by the potential pressure on earnings and valuationsMorgan Stanley's China equity strategist, Wang Ying, previously indicated to reporters that the outlook for corporate earnings might face a greater downward adjustment in the 2024-2025 timeframeValuation-wise, the forward price-to-earnings ratio for the CSI 300 Index rose from 11 times on January 1 to September 23 this year to 12.8 times for the period spanning September 24 to November 8. Similarly, the forward P/E ratio for the MSCI China Index escalated from 9 to 10 timesCurrent valuations appear reasonable, yet the future trajectory is likely to be hindered by external risks.

On the currency front, as of 16:30 Beijing time on December 10, the official closing price for USD/CNY was below 7.25, reflecting an accumulation of nearly 600 points from the previous week

Song Yu argued that monetary easing does not necessarily equate to significant depreciation of the currencyInstead, stabilizing economic expectations and asset prices can help keep the exchange rate firm.

Nomura's analysis drew parallels to a past period in 2018-2019 when China seemed to allow for some depreciation of the yuan to mitigate the adverse effects on exportsHowever, with a renewed focus on maintaining a stronger currency, alongside concerns about stabilizing the real estate and financial markets, the tolerance for significant depreciation of the yuan may be lower this time around.

Looking ahead, mainstream institutions advocate for a continuation and potentially an increase in China's stimulus policiesGoldman Sachs previously predicted a decline of 40-50 basis points in Chinese interest rates by 2025, but current monetary shifts may accelerate this timelineThey anticipate the announcement of a substantial 50 basis point reserve requirement cut to occur soon, alongside potentially large-scale implementations of new monetary tools, such as bond purchases and open market reverse repos, to inject longer-term liquidity.

Goldman Sachs further noted that as precise fiscal policy details emerge, historical trends indicate that the yield curve may steepen substantially; stock market rebounds following meetings could persist, particularly given the lighter positioning among international investors

The offshore yuan may benefit from positive momentum in Chinese assets, potentially stabilizing around the 7.3 mark, with the onshore USD/CNY midpoint likely remaining below 7.2, reflecting the central bank's intent to maintain currency stability.

Institutions have charted historical policies alongside related asset performances, noting significant adjustments in reserve requirements and interest rates in late 2008, which notably contributed to a noticeable rebound in the Shanghai Composite Index following the global financial crisis—with the index demonstrating a cumulative gain of 100% from its trough in November 2008 to August 2009.

UBS Asia-Pacific Chief Economist Wang Tao indicated that China's Central Economic Work Conference is poised to set the tone for macro policies leading into 2025, expecting a gradual ramp-up in stimulus measures.

The stimulus policy is partially aimed at counteracting external uncertainties

Wang hypothesized that the baseline scenario anticipates the US to announce additional tariffs on Chinese imports in the first quarter of 2025, gradually implementing these increases from the third quarter of 2025. This projection suggests a more significant impact of increased tariffs on China's economic growth may materialize towards the end of 2025 and into 2026. Consequently, she anticipates a phased increase in government policy support over the next two years, with the upcoming Central Economic Work Conference setting a proactive policy foundation for 2025 and unveiling specific support measures around the time of the "Two Sessions" in March 2025.

Similar to previous strategies, UBS speculates that the Central Economic Work Conference may advocate for more expansive fiscal policies, bolstering support for consumption and the residential sector, while further loosening monetary and credit policies as well as reinforcing support for the real estate market