China has finally met investors’ expectations by announcing a stimulus package far more ambitious than previous ones. This was a matter of urgency, as the main macroeconomic indicators continue to paint a bleak picture of economic activity, raising serious doubts about Beijing’s ability to meet its targets (annual GDP growth in excess of 5%). The Chinese authorities therefore brought forward their Politburo meeting devoted to the economy (traditionally held in April, July or December) to announce a series of measures. On the monetary front, a 50 bp cut in the reserve requirement ratio for banks was announced. This measure will free up liquidity ($142.5 billion), enabling banks to lend more. In addition, several other interest rates have been reduced to facilitate bank lending. Specific measures for the real estate sector will also be deployed, including a 0.5-point reduction in the interest rate on existing loans, which will significantly ease the debt burden for Chinese households. But that’s not all, as Beijing has opted to use debt to finance fiscal stimulus measures. China is expected to issue $284 billion in sovereign bonds, half of which will be used to support consumption (including a bonus for the poorest households with two or more children) and the other half for local authorities. This time, the government has struck hard: a stimulus plan on this scale had not been implemented since the Covid pandemic! Unsurprisingly, these announcements have been very well received by investors, and Chinese markets have been on fire in recent days.
But these measures are also positive for the rest of the world, and especially for the Eurozone, whose exports remain dependent on the health of the Chinese economy. It is also worth noting that disinflation is continuing apace in the eurozone, which should bolster household purchasing power and lower production costs for companies. Inflation data for September published on Friday in France and Spain confirmed the slowdown in inflation. The same is true in the USA: total PCE inflation came out at 2.2% year-on-year in August, the lowest level since February 2021.
On the political front, France remains a focal point for investors; the country’s 10-year borrowing rate even exceeded that of Spain on Thursday, for the first time since 2007! This is due to uncertainties surrounding the Barnier government and fears about growth, while the further deterioration in public finances raises the spectre of a fiscal tightening.
Finally, let’s not forget the escalating conflict in the Middle East. Israel’s elimination of several Hezbollah leaders on Lebanese soil is rekindling tensions, especially as Iran has indicated that it will not leave its ally alone, which could lead to a widening of the conflict. While the impact on financial markets is contained at this stage, we must remain cautious: the geopolitical risk remains high.
