Update on China Stimulus: A Game Changer?

A batch of measures.

Before the measures recently announced, China was confronted with significant deflationary forces and was struggling to meet its 5% GDP growth target. Youth unemployment rate reached 24%, consumer confidence has been at rock bottom levels for years, household consumption has remained well below pre-pandemic trends and the real estate market has been falling for four years.

• On September 24th, two days after the release of further monetary policy easing and liquidity support measures for equity markets, China's Politburo, led by President Xi Jinping, unexpectedly addressed the nation's economic slowdown. In just a few days, authorities have announced comprehensive measures2, including:
• Monetary support by cutting the reserve requirement ratio by 50 basis points and policy rate by 20 basis points. A 20-25 basis points cut in the 5-year loan prime rate (the benchmark rate for mortgage rates) is expected to follow soon.
• Stabilizing the struggling housing market by cutting the existing mortgage rate by 50 basis points, extending measures on commercial property loans for two years, allowing local governments to borrow up to 100% to purchase unsold but completed homes for use as social housing via the RMB300bn relending facility, and decreasing the downpayment ratio for second-home buyers from 25% to 15%.
• Liquidity support for equity markets, including a swap facility for securities firms, funds and insurance companies to tap liquidity from the PBoC to buy stocks and a relending facility for banks to support listed companies and major shareholders to buy back shares and raise holdings.
• Fiscal measures lack details, but support for low-income individuals is being considered, as well as child allocation for households with two or more children.
• China is also reportedly considering injecting up to RMB 1tn of capital into its largest state banks to increase their capacity to provide loans.

A first step in the right direction.

By announcing a raft of monetary and fiscal measures, Chinese authorities seem to be finally addressing the mounting deflationary pressures. For the first time, the September Politburo meeting highlighted the importance of supporting the economy, which underlines the sense of urgency. So far, the announced fiscal measures are expected to provide support worth only 0.2-to-0.3% of GDP3 but they should help China move closer to its 2024 target. These measures are a first step in the right direction, but the amount of support remains insufficient to put China’s economy on a sustained path out of deflation. Press leaks suggest that more fiscal support will be announced in the coming weeks.

A short-term rally.

These unexpected announcements have positively surprised markets, triggering a short-term rally. Chinese markets have strongly underperformed and have room for a re-rating. Chinese stocks are at a multi-decade low compared to US markets. Historically, the country has benefited from lower US rates.

Tactically, we have been selectively adding exposure to China in our Emerging Markets portfolios while reducing allocations in regions that appear overextended, such as India and in sectors like technology. In China, we favor the internet, financial, and consumer sectors. The recent repricing has been brutal, and a sustained rally from these levels depends on additional fiscal stimulus targeting consumers, further property measures, and structural reforms to improve employment conditions.

In our asset allocation portfolios, we have become more constructive and have also tactically increased our Emerging Markets and equities exposure overall. We recognise that it will take time to fully restore investor confidence, but in the short-term, we believe positive momentum can be maintained while we await signs of a more medium-term trend. The outcome of the US elections, and particularly US and international trade policies, will be key to gauge how sustainable this rally will be.