China unveiled a broad package of economic measures, including 20-30 basis point cuts in key policy rates, an increase in liquidity (by reducing the level of reserves required by banks), and a half percentage point adjustment of existing mortgage rates aiming to reduce the interest burden on homeowners.
The announcement comes amid concerns that China’s economy is slowing and might fail to meet its full-year growth target of 5%. Since the Covid-19 pandemic, the world’s second-largest economy has been struggling to rev up growth as it battles with a deflationary environment, contrasting with the runaway inflation seen in many other major economies. Additionally, a downturn in the property market has worsened the situation leading to weakened consumer spending.
How did Chinese stock markets react?
The initial market reaction following the announcement was very positive, with Chinese equity prices rallying at speed. The CSI 300 index, the 300 largest listed companies in mainland China , had its best weekly performance since 1998 – soaring up by 33%.
Since then, Chinese markets have now given back some of their gains – suffering their worst fall in 27 years – as investors have become concerned about the size and scope of the proposed stimulus package.
Further supporting announcements revealing specific fiscal policies were expected to follow from officials, but such plans are not forthcoming at this stage.
At the time of writing, the overall spending was significantly below the multitrillion yuan levels that analysts had anticipated. China’s Ministry of Finance (MoF)~ held a briefing scheduled on Saturday (12th October) to provide more clarity to the market. While the broad announcement of larger fiscal deficit spending and bank recapitalisation was welcomed. Investors were once again left in the dark as to the size and timing of the package, pending the National People’s Congress (NPC) Standing Committee meeting expected later this month.
Our view on the stimulus package
The stimulus measures announced will provide a welcome boost to asset prices over the short term. They also point in the right direction of supporting consumers and cleaning up bad debt in the system. However, in our view, more needs to be done by revealing additional measures to address the domestic demand and other structural problems.
While one-off stimulus measures may boost asset prices and market sentiment temporarily, an increase in liquidity and marginally lower borrowing costs are unlikely to turn the corner on the main issue affecting China – weak domestic demand.
For longer-term prosperity, it’s important for the Chinese government to revive the property market, offer more accommodative fiscal policies, and provide long-term income support for households. This will go some way to restoring income and wealth across households, increase consumer confidence and boost overall consumption.
Investing in China
We don’t think enough has been done to reconsider investing directly or indirectly into Chinese equities.
If further economic stimulus was announced, it could have a positive knock-on effect in other countries, such as Europe and other Asia regions. A proxy play in these regions may offer more stable opportunities while still providing indirect exposure to the broader Chinese economy.
Increased consumer demand could positively impact the luxury goods sector – benefiting companies like LVMH, which owns a range of high-end brands in fashion, wines and spirits, perfumes, and cosmetics. Additionally, there could be positive spillover effects into certain Asia-Pacific (APAC) regions, such as Taiwan, which could profit from increased demand for semiconductors chips.
For now, we remain underweight on Chinese equities. We’ll continue to monitor the situation and wait for more information on the size and timing of additional stimulus (if any) before considering the region as a buying opportunity.
Chinese markets and economic performance are likely to remain volatile while uncertainties remain. External factors such as geopolitical tensions, trade disputes, and the outcome of the US election could have a further impact on China.
The bottom line
In summary, while the stimulus has sparked a notable market rally, we think the market reaction was overdone and weren’t surprised to see Chinese equities reverse in recent days. A substantial and effective fiscal policy follow-through is needed for a long-term recovery.
Only time will tell to see if China has done ‘whatever it takes’ to hit its growth target, or whether it’s ‘too little, too late’.
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