(Bloomberg) — Chinese stocks weathered a period of initial volatility to post their biggest gain in a week on Monday, suggesting investors are confident the government will deliver on its promise of stronger fiscal support.

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At a highly anticipated briefing on Saturday, Finance Minister Lan Fo'an announced new steps to support the real estate sector and hinted at increased government debt. While authorities refrained from citing the U.S. dollar headline that investors wanted, Goldman Sachs Group Inc. viewed the latest moves as a sign of increased policy focus on growth. It raised its forecasts for China's economic growth in 2024 and 2025.

The CSI 300 index rose 1.9% at the close, rising to 25% from a September low. The move helped revive China's historic stock rally after it stalled last week. A gauge of real estate stocks on the Shanghai Stock Exchange rose 4.7%.

Increasing government spending remains key to sustaining the recovery sparked by the central bank's stimulus packages at the end of September. Traders are betting that the Standing Committee of the National People's Congress, China's top legislature, will approve additional budget funding when it meets later this month.

“The Treasury's forward guidance has worked to some extent, as it suggests that a large new package is on the horizon at the central government level,” said Homin Lee, senior macro strategist at Lombard Odier. “Onshore retail investors are likely to stick to their hopeful mode in the near term, but that may not last if the government delays its stimulus packages even further into December.”

China's latest economic data underscores the need for authorities to do more. Figures released on Sunday showed that deflation problems worsened in September as consumer prices were still weak and factory prices continued to fall. Trade data released after markets closed on Monday showed exports – which were a rare bright spot – rose much less than expected last month.

In Hong Kong, an index of Chinese stocks closed 0.5% lower, adding to a 6.6% decline last week. It has risen more than 30% in the last three weeks.

“Upside Capped”

At Saturday's press conference, Lan and his deputies said local governments would be allowed to use special bonds to buy unsold houses. Lan hinted at scope to issue more government bonds and vowed to reduce debt burdens on local governments, signaling a potentially rare budget revision that could come in the next few weeks.

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Bonds issued by China's local government financing vehicles rebounded. Although the minister did not give a specific amount, he said the scale of the one-off effort to raise the local government's cap on hidden debt exchanges would be the “largest in recent years.”

Officials from various Chinese ministries vowed in a separate briefing on Monday to increase policy support for companies.

“Although there was no major fiscal stimulus, the Treasury press conference was still a positive surprise for us,” economists at HSBC Holdings Plc, including Jing Liu, wrote in a note. “The policy reversal is likely to continue as increasing risk appetite creates a wealth effect in both equity and real estate markets.”

Market volatility had increased ahead of the MOF briefing, with the CSI 300 index falling 3.3% last week. Investors and analysts surveyed by Bloomberg had expected China to provide up to 2 trillion yuan ($283 billion) in new fiscal stimulus, including potential subsidies, consumer vouchers and financial support for families with children.

As the initial stock euphoria wears off, concerns could grow that the recent rally could be another false dawn. The market has been in a start-stop cycle of gains and losses in recent years as Beijing's gradual stimulus measures produced only brief recoveries.

“The Finance Ministry has done everything it can to give hope to the market,” said Xin-Yao Ng, investment director at abrdn Asia Ltd. “I suspect that the US election in November and the FOMC could push any major stimulus into December or later.” And investors could stay away before and ahead of third-quarter results, so the upside could be somewhat limited for now.”

– With assistance from John Cheng.

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