What China's fading stock rally could mean for investors

The recent surge in Chinese stocks hit the pause button on Tuesday after Beijing failed to roll out another large stimulus package, a surprise to investors hoping to add more fuel to the unprecedented rally.

Hong Kong's benchmark Hang Seng Index (^HSI), which is loaded with large Chinese stocks, dropped around 9% on Tuesday, its worst day since October 2008, after climbing around 20% over the past month on the heels of China unleashing its most aggressive monetary stimulus since the pandemic.

China’s benchmark CSI 300 (000300.SS) also experienced a volatile day as expectations of a large stimulus announcement fueled an initial 10% rise after markets reopened from the country's weeklong holiday. The index later gave up those gains, finishing the day up a more modest 6%.

The stimulus, an effort by China to course-correct its struggling economy, was first announced on Sept. 24. Since then, a surge of inflows has dramatically boosted Chinese equities, particularly in real estate and consumer staples, as investors bet on Beijing's comeback.

But Wall Street remains split on whether or not now is the right time to buy into the market.

"The short-run pop [signals that] people are feeling better," Jeremy Schwartz, chief investment officer at WisdomTree, told Yahoo Finance's Market Domination. "Will it be enough to move their economy? That's very much an open question [because] the sentiment was so, so negative."

The stimulus, which includes interest rate cuts, lower reserve requirements for banks, liquidity for the stock market, and mortgage relief, among other measures, comes as the nation's second-largest economy attempts to pull itself out of a long slump spurred by deflationary pressures from a sluggish property market and weak domestic demand.

At a press conference on Tuesday hosted by China's top economic planner, the National Development and Reform Commission (NDRC), Beijing said it's committed to enacting further support in order to reach its economic goals, which include an annual growth target of "around 5%."

"We are fully confident in achieving the annual economic and social development targets," Zheng Shanjie, chairman of the NDRC, told reporters. However, he did acknowledge that the Chinese economy is facing a "more complex and extreme" global environment.

At the press conference, the NDRC announced it would issue 200 billion yuan ($28 billion) to local governments for spending and investment projects by year's end. But economists have been waiting for a fiscal package worth around 2 trillion yuan ($284 billion) to be announced.