The recent performance of the A-share market within the backdrop of significant policy stimuli has left many investors feeling disappointedThe anticipated “slow bull” market has yet to materialize successfully; despite surviving a tumultuous Black Thursday, the market is now grappling with another downturn, diving below the critical 3,400-point markInvestors are questioning whether this is merely a symptom of the broader economic adjustments taking place.

As the ramifications of policy changes continue to reverberate through the financial landscape, students of the market speculate that upcoming weeks may bring about more aggressive monetary adjustments, akin to interest rate cuts both in China and a potential shift in the United StatesIn fact, Canada and the Eurozone have already initiated a path towards lowering interest rates, while Japan is shifting focus from previous hikes to maintaining the status quo on their interest ratesThe effective softening of monetary policies globally particularly suggests that, should the Federal Reserve lower rates again in December, it could potentially lead to a more favorable environment for A-shares.

What’s in store for U.S. interest rates?

Many in the market contest that the cycles of interest hikes and cuts in the U.S. have little bearing on A-sharesHowever, observable correlations exist; the recent surge in A-shares can be traced back to a prior rate cut by the Federal Reserve in September, coupled with easing fiscal policies which fueled a bullish runA reduction in U.S. interest rates could indicate a shrinking interest rate differential between the U.S. and China, potentially attracting capital flows back to China.

November’s Consumer Price Index (CPI) data from the United States has revealed an increase of 0.1 percentage points from the previous month, landing at 2.7%. This figure stands alarmingly above the Federal Reserve's target inflation rate of 2%, which under normal circumstances would trigger a response from the Fed to increase rates

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Yet, with market sentiment placing a staggering 96% chance on a Fed interest rate cut, uncertainty looms largeSome foresee that even with rising inflation, global economies like Canada and the Eurozone might be establishing precedents that warrant easing measures.

The immediate causes for an inflated CPI appear to stem largely from post-hurricane recovery efforts, leading to higher spending in refurbishments and automotive purchasesHowever, analysts suggest that this spike may not persist, indicating a potential return to stability in the pricing environment.

The non-farm payroll data from the U.S. has also surpassed expectations, yet the unemployment rate has surged beyond the cautionary threshold of 4%. A Fed that is ostensibly non-political in its decisions still must navigate the complex interplay between rising inflation and unemployment, universally recognized economic indicatorsAs we stand, the economic landscape presents challenges — with inflation stagnating and unemployment rising, the Fed finds itself straddling the line of whether to tighten or loosen monetary policyAdditionally, an aggressive hike cycle previously imposed in 2022 has consequences that manifest only after time has elapsed, suggesting that more than reactive measures may be necessary.

China’s leadership appears aware of the above dynamics and is ready to adjust its monetary policies in anticipation of developments in U.S. strategyA secondary rate cut by the Fed could significantly expand China’s financial maneuverability.

A strategic push for A-shares

The latest pertinent meeting held this year determined a policy stance of "more proactive fiscal policies" combined with "moderately loose monetary policy" for the upcoming yearIt stands in stark contrast to the pattern of the last decade, where policies were characterized as conservative and cautious

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Now, the scope of these "moderately loose monetary policies" evokes recollections of the post-2008 financial crisis era, suggesting strategic maneuvers aimed at economic revitalization akin to those taken during the last significant financial downturn.

The acknowledgment of “moderately loose monetary policy” echoing sentiments from over a decade ago signifies seriousness in addressing current economic challengesThe market can expect increased liquidity measures including central bank purchases of government bonds, along with heightened reverse repo and medium-term lending amounts, revealing ongoing attempts to ramp up borrowing levels successfully.

A definitive goal for China’s economic strategy is to decisively terminate deflation pressures, a move that resonates positively for the stock market, the real estate sector, and broader economic healthThe government’s determined approach projects a brightened forecast for 2025, perceived by many as a step up from anticipated conditions in 2024. Notably, this year has demonstrated conservative approaches to both monetary and fiscal policy.

Now, the new strategy emphasizes “strengthening extraordinary counter-cyclical regulation,” illustrating a substantial shiftGiven these recent developments, further cuts in reserve requirements are on the horizon, a circumstance likely to unfold soon.

Expanding domestic demand remains a priority

The government’s focal policies aimed at stimulating domestic demand translate directly into tangible benefits for citizens, notably the enhancement of household incomes and job creationTherefore, strategies to boost consumer demand have emerged as key elements of this latest policy frameworkDetailed plans concerning how to invigorate consumption create anticipation among market participants.

January’s A-share market was characteristically volatile, with a staggering drop of 2% marking another breach of the 3,400-point threshold

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