Fast reading
- At the most recent Politburo meeting, President Xi Jinping outlined a far-reaching commitment to enact measures that protect the economy, property and equity markets from further deterioration – it was a clear ‘whatever it takes’ statement.
- Officials have launched a series of fiscal and monetary stimulus measures, but investor enthusiasm has been tempered by a lack of clarifying detail. Recent actions include cuts to benchmark lending rates.
- The Chinese government appears to be navigating a delicate balancing act, caught between wanting to drive a sustainable recovery, and avoiding another debt-fuelled bubble.
In late September, the Beijing government announced a broad package of monetary stimulus measures designed to breathe fresh life into the country’s faltering economy. The programme included a cut to the amount of capital banks are required to keep in reserve, liquidity support for equity markets, and increased support for the property sector.
The measures lit a fire under Chinese stocks as investors piled in, with many companies trading at cut-price valuations. The Hong Kong Hang Seng index quickly rose to become the best performing major global market this year, up 33%, compared to under 20% for the S&P 500 index1. Meanwhile, the Hang Seng Tech Index, which tracks 30 Chinese technology companies listed in Hong Kong, soared more than 45% in the space of under four weeks.
Figure 1: The rebound in Chinese equities vs. global peers
It was inevitable markets would lose a bit of steam after such an abrupt upwards trajectory and many leading indices dipped.
In response, the People’s Bank of China (PBoC) sought to maintain investor interest with a news conference in early October about its stimulus programme. But an ongoing lack of detail about how it plans to revitalise its domestic economy continues to leave many foreign market participants on the fence.
The benchmark CSI 300 index fell 7.1% on 9 October – after 11 days of gains – as markets reopened following China’s ‘Golden Week’ holidays2. The Hang Seng Index, meanwhile, had erased all gains made since the introduction of the stimulus package by this point.
Stocks have since regained some ground in the wake of further announcements. The CSI 300 closed up 3.6% on Friday 18 October3, for example, after the central bank officially initiated the securities, funds, and insurance companies swap facility (SFISF) which allows non-bank financial institutions access to funding to buy shares. Most recently, China’s one-year loan prime rate was cut from 3.35% to 3.1%, and the five-year from 3.85% to 3.6%, on Monday 21 October.
While the upswing still represents a positive break from the prolonged period of losses that has marred China stocks over the last few years, the market turbulence may be indicative of the extent of the challenge facing officials.
The root of the problem
China’s property market has been in a rut for a number of years, hamstrung by huge debts and severe liquidity stress. The default of Evergrande, the country’s second largest developer, in 2021 sent reverberations across the sector. Real estate had previously accounted for around 20%4 of GDP growth, but faced with slowing sales and rising credit problems, local governments have had to contend with a sizable loss of revenues as a consequence.
China has also had to grapple with falling inflation. This problem of disinflation – which first became apparent at the end of the credit boom in the 2010s – has been further exacerbated by the struggling property market and the fallout from the Covid-19 pandemic. In response, many households have increased their precautionary savings levels, which has only fuelled deflation further. On top of this, additional downward pressure on prices has been caused by reduced revenues from land sales as well as high levels of government debt.
Previous ‘false dawns’
In a bid to shore-up the economy, Beijing has made a number of policy announcements over the last two years, but these incremental measures have had little impact. (In May, for example, China announced a US$70bn lending plan to allow local government enterprises to buy up unsold property and lease it as social housing. However, by August, banks had only lent out about 5% of that figure5.)
For investors wary of ‘false dawns’, the September stimulus package looked different. It suggested a renewed commitment to address the crunch issues in property and local government financing that have acted as a drag on the domestic economy – and the prolonged downturn in real estate, and weak consumer and business confidence, that have contributed to the deflationary spiral.
For investors wary of ‘false dawns’, the September stimulus package looked different.
Can Beijing do enough?
At the most recent Politburo meeting, President Xi Jinping outlined a far-reaching commitment to enact measures that protect the economy, property and equity markets from further deterioration – it was a clear ‘whatever it takes’ statement.
But the Chinese government continues to navigate a delicate balancing act, caught between wanting to drive a sustainable recovery, and avoiding another debt-fuelled bubble. (Officials will be keen to avoid a repeat of the 2015 stimulus, where the onshore market doubled in value before crashing in a short space of time afterwards).
The aim this time around appears to be stabilised growth, and to prevent deflation, while the market goal is to restore confidence and to engineer a steady increase in the stock market, rather than spark a euphoric move higher. However, Beijing remains likely to adopt a cautious approach to introducing the components of a high-impact stimulus package.
Walk the line
In mid-October, China followed up with a fiscal stimulus package that set out plans to help state banks, property, and low-income earners. The central bank promised to ramp up government debt issuance to achieve these objectives but stopped short of outlining how much it plans to spend.
(The reverberations of the whopping US$586bn 2008-09 fiscal stimulus6 can still be felt in the country today in the high levels of local government debt.)
The combined stimulus blitz has the potential to address the ongoing issues in the property market and help rebuild consumer confidence, but once again, more details will be needed to reassure investors. The size and scope of Beijing’s commitment remains paramount. In order to maintain the stock market rally, officials will need to continue to walk a very fine line for some time to come.
For further insights on emerging market equities please see: GEMs Equity Outlook, H2 2024
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1 Bloomberg as at 7 October 2024
2 Bloomberg as at 9 October 2024
3 Bloomberg as at 18 October 2024
4 Source: IMF
5 Source: FT
6 Source: OECD
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