China Stock Outlook Remains Muted With Stimulus Seen Limited

(Bloomberg) -- For China traders fed up with markets doing nothing for days, even Friday’s set of historic economic data failed to give them a sense of direction.

The Shanghai Composite Index closed 0.7% higher, stuck near its 30-day average, on turnover that was about half the recent peak. The offshore yuan added 0.1% to also trade close to its average level for the past month. The yield on 10-year government debt hasn’t moved more than 4 basis points in either direction for a week.

Gross domestic product shrank 6.8% in the first quarter from a year ago, the worst performance since at least 1992 when official releases of quarterly GDP started, missing the consensus forecast of a 6% drop. Factory output fell 1.1% in March, retail sales slid 15.8%, while investment decreased 16.1% in the first three months of the year.

“Investors already priced in weak data, so reaction is muted,” said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group in Shanghai. “Looking ahead, we expect the economy to be faced with pressure to contract again in the second quarter. The central bank will inject liquidity in a targeted manner.”

So far the Chinese authorities have been relatively restrained in providing stimulus to offset the impact of the pandemic, especially compared with central banks in the U.S and Europe. That’s given traders few incentives to either buy or sell.

The People’s Bank of China refrained from offering one-year medium-term loans Friday even as 200 billion yuan ($28 billion) of the funds mature.

China’s central bank had already injected a net 100 billion yuan via the lending facility on Wednesday, while cutting the rate it charges on the loans to 2.95% from 3.15%. The reduction was expected as the central bank already trimmed costs on 7-day market operations in late March and the interest rates tend to move in tandem.

Local officials’ actions may be hampered by concern that additional stimulus will flow into speculative activities and fuel unsustainable debt, rather than aid productive parts of the economy.

This may already be happening. Yields are so low in the country’s short-term debt market -- with one company this month selling bonds as cheaply as 1.74% -- that some firms may be issuing debt and using the proceeds to buy high-yielding asset management products, according to BNP Paribas SA and Citic Securities Co.

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