I can’t help utilizing the recent bouts of Chinese economic stimuli to one of that country’s most notable inventions. Gunpowder and fireworks were both invented in China, so it only seems fitting to think about the efforts to bolster that country’s economy and markets in those terms.
Chinese authorities unleashed a blitz of stimulus measures on their economy this week. Most were monetary. These included:
- Tuesday:
- A rare press briefing from the People’s Bank of China (PBOC), the country’s central bank
- A 50-basis point reduction in reserve requirements
- Cut repo rates by 20bp to 1.5%
- Cut mortgage rates by roughly 50bp to about 4%
- Lowered the minimum down payment on second homes to 15% from 25%
- Introduced a swap program to help stocks (about US$70bn equivalent)
- Wednesday:
- Cut rates on loans to banks by 30bp to 2%, affecting about 300 billion yuan (about US$43 billion)
- Added nearly 200 billion yuan (about US$28 billion) into the banking system through reverse repos
- Thursday:
- The Politburo pledged to support the housing sector and add fiscal spending
- Issued nearly US$300 billion in new bonds to pay for fiscal stimulus
- Friday:
- After today’s Chinese close (before the US open), the PBOC cut rates by 20bp from its Standing Lending Facilities. The overnight rate is now 2.35%, the 7-day is 2.5% and the 1-month is 2.85%
This barrage makes the Fed’s recent 50bp cut seem a bit pedestrian, no?
Unsurprisingly, mainland China’s benchmark index had its best week in 16 years, as the CSI 300 rose by 15.7%. If the Chinese authorities wanted “shock and awe”, they succeeded. And that should be a good thing for the global economy.
It is important to remember the situation the last time that the Chinese market soared this much. In 2008, the Global Financial Crisis (“GFC”) was punishing a wide range of economies and markets. China was among the fastest to recover, and the Chinese economic expansion that ensued in the 2010’s helped bring the world out of its funk. It was therefore concerning that China appeared to be getting mired in malaise. If its positive influence was such that it could bolster the global economy over a decade ago, its negative influence could be a sufficient drag in the coming years. That would be bad for most investments, which is why, politics aside, investors should be favoring China’s measures.
Yet the responses have varied. European shares pushed, with the recently forlorn luxury sector showing a rebound. It is unlikely that those companies were an intended beneficiary of the Politburo’s activities, but a more robust Chinese consumer can’t hurt them. Here in the US, stocks have generally moved higher, but not particularly robustly. We seem to be digesting our most recent rate cut and more consumed with pondering the next. Paradoxically, if one has been buying stocks on the hope that more aggressive cuts are coming, a stronger global economy doesn’t help – at least in the short-term.
Even commodities were mixed. Copper prices are up about 6% this week, but oil is down by a similar percentage. Tensions in the Middle East, or the current pause in escalation, have much to do with those moves, but a uniformly stronger Chinese economy should bolster demand for a wide range of commodities.
Perhaps the muted responses belie a nagging concern: are things really that bad in China that such a dramatic orchestrated response was required? The measures aimed at bolstering the flagging real estate sector, such as a drop in the down payment for second homes, seem to be a sign that things might be truly dire for homeowners and landlords. As we learned the hard way during the GFC, a downward spiral in real estate, which is typically purchased using borrowed money, can result in nasty deflationary effects that can spread unpredictably. It is encouraging that the Chinese authorities are undertaking bold measures to hopefully stave off a metastasizing crisis – particularly in an equity-market friendly manner – but we won’t know if those measures will ultimately bring success.
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Sounds like a Jackie Chan movie. “Big trouble in Little China.”
Great summary of China’s economic situation, appreciate the details on the several announcements made this week.
Thanks for engaging!
Good article for the big picture but I would like more information on how it affects me now and in the short term.
To Anonymous: A short version: China stimulus good for a very strong short term euphoria rally. Biggest take away: stimulus may by extension also add strength to global economy, which could slow timeline and/or magnitude of further rate cuts by central banks. What was not mentioned was that inflationary effect of stimulus within Chinese economy could stoke inflation to rest of world as for the past while now China’s deflationary problem has benefited the global fight against inflation by providing cheaper goods. Stimulus work as intended and same Chinese export goods now not as cheap, which could uptick inflation for importing countries.
I think I have that right. If not, I will have to remain an Old Retired Guy and ditch any hopes of being an Economist. :-\
China’s economy is in trouble b/o its stimuli come from a centralized source; in particular, the funding of enormous construction which has not sold. Now we have monetary stimuli in the absence of a monetary crisis, designed to benefit the financial world, not the populace. Better they should have given money to people, in proportion to how much they need it, so they could stimulate the economy by buying clearly needed things. I’m with MonochromicPony.
Thank you for this article. I was in-out of BABA shares with some gains as I am a short-term focused participant. It would make sense if as the Chief Strategist you could perhaps share some ideas on specific segments of the markets. For instance, cover livestock, metals, energies, agris among commodity futures along with a broad analysis of the equities markets while focusing on the 11 segments of the S&P. Have your other analysts cover world markets and currencies.
Hello, thank you for reaching out. We have sent your suggestion to the appropriate team. We hope you continue to enjoy Traders’ Insight!
i thought the article was well informing considering the most important information is the amount of monetary stimulus the Chinese gov. injected, and if you understand monetarism, that’s basically the most important information that you need to trade chinese equities.