China’s big monetary policy shift spurred a stock surge. But ‘a lot of volatility’ still looms.

Chinese stocks rallied on Monday after the country signaled a more aggressive approach to stimulus next year. Beijing’s top leaders revealed they will embrace a “moderately loose” monetary policy and a “more proactive” fiscal policy, according to China state media Xinhua News Agency. “Relative to the low market expectations prior to the meeting, we view the outcome as an upside surprise due to stronger easing rhetoric,” Goldman Sachs chief China economist Hui Shan wrote in a note to clients on Monday, adding the team expects “more concrete demand-side stimulus measures” to be announced early next year. Notably, the last time China described its monetary policy stance as “moderately loose” was in 2009-2010, according to the economist. The comments come as China braces for a possible trade war with the United States. President-elect Donald Trump has pledged to impose blanket tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports. Also on Monday, news broke that China has opened an antitrust investigation into US-based chip giant Nvidia (NVDA), which analysts have described as a “calculated geopolitical” maneuver amid escalating tensions between the two countries. Hong Kong’s benchmark Hang Seng Index (^HSI), which is loaded with large Chinese stocks, rose about 3% on Monday following the comments. Other Chinese-listed exchanges and companies echoed the moves to the upside. China’s benchmark CSI 300 (000300.SS) rose over 1% on Monday. Similarly, shares of Chinese e-commerce giants like Alibaba (BABA), PDD Holdings (PDD), and JD.com (JD) all jumped at least 9%. Chinese electric vehicle maker XPeng (XPEV, 9868.HK) also surged double digits, rising nearly 14%. But these names have also struggled in recent months. The Hang Seng Index is down about 1% since early October after erasing the gains it enjoyed following the country’s most aggressive monetary stimulus since the pandemic. The stimulus, an effort by China to course correct its struggling economy, was first announced on Sept. 24 and included policies like interest rate cuts, lower reserve requirements for banks, liquidity for the stock market, and mortgage relief, among other measures. At the time, Chinese equities were instantly boosted, particularly in real estate and consumer staples, as investors bet on Beijing’s comeback. But in October, China failed to roll out another large stimulus package, a disappointment that resulted in the most recent pullback. Still, Wall Street watchers say Beijing’s latest language serves as an encouraging sign that more relief is on the way. “The fact that [China] is introducing both now monetary stimulus on top of a fiscal stimulus that’s already been announced a few months ago is positive,” Burns McKinney, senior portfolio manager at NFJ Investment Group, told Yahoo Finance’s Catalyst program on Monday. “It does indicate that the policymakers there see there’s a problem.” The nation’s second-largest economy has been mired in a long slump spurred by deflationary pressures from a sluggish property market and weak domestic demand. McKinney said it’s still likely Chinese equities will face “a lot of volatility” in the near term, “especially with the tariffs that are being introduced.” “But for investors with patience and a long-term time horizon, you do have valuation on your side when it comes to China,” he said. “You do have a lot of headwinds turning to tailwinds as far as the regulatory onslaught on some of the tech companies, as well as the fact that we’re now starting to see fiscal and monetary tailwinds.” Beijing has maintained that it’s committed to enacting further support in order to reach its economic goals, which include an annual growth target of “around 5%.” Chinese President Xi Jinping and other leaders will reportedly meet this week to discuss those growth targets and economic goals. But a full recovery hinges on the magnitude and execution of future fiscal policy, according to economists. “Policy implementation remains key for the effectiveness of stimulus,” Goldman Sachs’ Shan said. “Today’s meeting adds conviction to our view that fiscal easing will do the heavy lifting to stabilize growth, but the composition of this easing will likely differ substantially from past cycles, with more focus on consumption, high-tech manufacturing, and risk containment rather than traditional infrastructure and property investment.”