Growth down, stock index up

An investor smiles at a securities brokerage in Huaibei city, Anhui province, on Dec 8, 2014. [Photo / Asianewsphoto by Xie Zhengyi]

China's tone-setting Central Economic Work Conference provided valuable clues to monitor the country's policy stance and how it will influence the financial market.

On the macroeconomic front, the conference said China will continue to adopt a "prudent" monetary policy and "proactive" fiscal policy. Different from the normal wording in previous post-meeting statements, the conference said monetary policy should be neither too tight nor too loose, and fiscal policy should be more "forceful".

The statement shows that China will keep its financial policies largely stable, meaning policies that are similar to the current mini-stimulus packages will continue to be rolled out to prevent the economic situation from worsening.

The wording that requires the fiscal policy to be more forceful is especially eye-catching. It means that while China is reluctant to take large-scale stimulus measures to anchor the economy, it will not hesitate to resort to more fiscal supports to ensure it keeps going. Fiscal measures, such as infrastructure investment (including investment brought about by the One Belt and Road Initiative), will hopefully be ratcheted up even at the cost of expanded fiscal deficit ratio. It will help offset the possible adverse effect brought on by the expected further cooling of the real estate sector.

China's growth slipped to 7.3 percent in the third quarter, the slowest since the 2008-2009 global financial crisis. More seriously, it is facing multiple challenges, such as a cooling property market, high local government debt levels and falling prices.

The central conference sent an unequivocal message that policymakers are prepared to tackle those difficulties through monetary and fiscal adjustment in accordance with changing economic conditions.

Therefore, although economic growth may continue to dip, the stock market, which has already risen by more than 20 percent in the past two months, may even become looser next year, laying the groundwork for a possible rally.

From the microeconomic perspective, the country will press ahead with its reform agenda and, at the same time, search for new growth engines to anchor the world's second-largest economy.

The central conference highlighted the importance of supporting the development of key industries, such as infrastructure connectivity, new technologies and industries, agriculture, environmental protection, new energy and health, to bolster the economy. It means China will jetison the traditional way of production and pay more attention to development of a clean and competitive economy that is built on promising emerging industries. The adoption of the new stance will help both stabilize the overall economy and lay a solid foundation for China's sustainable development in the coming decades.

Given the new stance reflected at the conference, there could be more supporting industry policies next year to implement the central government stance and upgrading China's industrial structure, an initiative that will usher in rich opportunities for stock market investors.

The market, therefore, may continue to cash in on the expected richness of liquidity and new industry policies next year.

The stock indexes have risen strongly in the past two months, sparking concerns that it may have become overbought and the major corrections last week are interpreted as the end of the strong but short-lived rally.

Those with a short view of the market may be justified if the stock index dances exactly in tune with the GDP growth trend, but actually it is not the case in China. There is often a big gap between their steps.

The possibility is high that the index continues to rise next year after some corrections, although no one is sure where the ceiling is.