Chinese Stocks Rebound on Stimulus Hopes

Chinese stocks rebounded Wednesday from 6-month lows as Premier Wen Jiabao hinted that further fiscal stimulus may soon be announced. In a post on the government's website, Premier Jiabao said that the country needs to maintain a certain amount of growth and private investments in railway, public utilities, energy and telecommunication companies, health care and education.

Infrastructure stocks led gains on the day, with China Railway Erju Co. and Anhui Conch Cement Co. leading gains. Healthcare and consumer staples stocks were strong, sectors that are largely considered safe and not risk-on. The strength in both "safe" sectors and "risky" sectors could be pointing to uncertainty among investors. China's government tends to hint at policy such as infrastructure spending ahead of new policies, and the comments from Jiabao fueled this. However, some believe that further rate cuts will be used to stimulate growth, not infrastructure spending, and thus safe stocks rallied.

The Shanghai Composite Index is down 1.09 percent year-to-date after rising as much as 12 percent earlier in the year. Data on money supply growth is due out as soon as today and this data could add fuel to the fire. Lending growth data is a proxy for economic health and weak lending data will raise fears of a hard landing and a further decline in output. A decline in lending also signals that there are deleveraging and disinflationary pressures, and further fiscal stimulus could act to fill the gap in lending growth. By borrowing money, the government can fill the hole created by the lack of lending growth.