On September 24, the People’s Bank of China (PBOC), the National Financial Regulatory Administration (NFRA) and the China Securities Regulatory Commission (CSRC) announced a series of measures to boost the country’s growth, in an obvious attempt to boost market sentiment. The Shanghai Composite stock index reacted positively, recording its biggest rise in over four years. Do these stimulus measures mark a new dawn for the Chinese economy and Chinese assets?
Stimulus plan exceeds (modest) expectations
The stimulus package was larger than we thought likely ahead of the US elections in November. We thought that Chinese policymakers would limit themselves to modest monetary easing and a few additional regulatory adjustments in the real estate sector. Indeed, the negative shock induced by a possible second Trump term might cancel out the effects of such a stimulus plan. That said, and irrespective of the US election, disappointing Chinese economic data and the start of the Federal Reserve’s rate-cutting cycle have both argued for earlier-than-expected action.
While the PBOC cut its benchmark short-term interest rate by 20 basis points (bps) to 1.5% in line with our forecasts, it also lowered banks’ reserve requirement ratio by 50 bps. PBOC Governor Pan Gongsheng also hinted at further reductions in these ratios should economic conditions warrant.
Additional support has been announced for the ailing real estate sector. With a view to reducing the stock of unsold housing, the PBOC has adjusted the conditions of its loan support mechanism to make the direct purchase of unsold housing by local state-owned enterprises more attractive. The authorities will also allow early refinancing of existing mortgage loans, albeit on a slightly smaller scale than media reports had suggested. The down-payment ratio for second homes has also been lowered from 25% to 15%. Six major banks were promised capital increases.
New measures to support the equity market came as a pleasant surprise. The PBOC has set up a swap program for an initial amount of 500 billion yuan (CNY), equivalent to just over USD 70 billion. Institutional investors, including asset managers, funds and insurers, can pledge various risky assets as collateral against highly liquid assets, so as to strengthen their ability to buy equities. In addition, a CNY 300 billion loan program has been set up to finance share buybacks. During the press conference, policymakers alluded to the re-launch of a state-backed market stabilization fund.
Although the separate measures may seem limited and similar to previous ones, there was a sense of urgency in this simultaneous announcement – a forceful attempt to boost market sentiment. In the face of deeply pessimistic expectations, this attempt could challenge investors’ extremely negative positioning. Pressure on the yuan is easing, giving the PBOC some leeway to increase its liquidity injections.
Further substantial measures are unlikely before the US elections
It will take a lot more to change our cautious assessment of China’s medium- to long-term economic trajectory. The most immediate challenge is the stabilization of the property market, still plagued by falling prices and a glut of unsold or unfinished homes. Although recent policy announcements may encourage more state-owned enterprises to absorb some of the excess housing stock, household demand for property loans remains extremely weak due to the accelerating fall in house prices and lingering doubts about developers.
Other measures could include local authorities using the proceeds of special bond issues to purchase unsold housing, as they can already do for unused land held by developers. Authorities could use tax incentives to make housing more accessible to developers and end-buyers. A more aggressive decision on tax policy is also necessary in our view, but will probably be postponed until December at the earliest.
Another fundamental inconsistency that needs to be addressed is the desire to aim for both a strong yuan and credible reflation. China is facing significant deflationary pressures, but a genuine reflation program suggesting either an unlimited injection of funds for real estate, or support for stock markets, would weigh on the yuan.
Recent policy measures seem to reflect a search for technical adjustments that avoid addressing this inconsistency. Yet unless Beijing is prepared to approve massive fiscal stimulus measures, a much weaker yuan will probably have to be accepted to remedy persistent price weakness. In this respect, the US elections are important. If China intends to neutralize the impact of any new punitive tariffs from Trump, a significant one-off devaluation of the yuan may be necessary. Conversely, if Kamala Harris wins, the removal of fears of additional tariffs would provide a more favorable backdrop for Chinese policymakers and the market. Consequential decisions on fiscal or monetary policy will therefore probably await the US election, with technical adjustments and monetary policy signals as interim options.
Neutral exposure to Chinese assets maintained at this stage
We currently hold no tactical investments in Chinese assets and maintain our portfolio allocations at strategic levels. Within emerging equities, our exposure to China remains aligned with MSCI indices, and we focus on a selection of listing markets and sectors. We await the outcome of the US elections before reconsidering this fundamental positioning.
More risk-tolerant investors wishing to increase their exposure to China may consider stocks in the consumer discretionary and communication services sectors listed on the Hong Kong market, as well as a selection of mining and luxury goods stocks. Even if China’s medium-term outlook remains mixed, further stimulus measures or a positive turnaround in property demand could push these stocks higher. In the same vein, investors can also turn to non-Chinese assets with high exposure to the Chinese economy.
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