Quick Bites | China stimulus moves markets

China has launched an extensive stimulus plan to bolster its economy – including interest rate cuts, reduced reserve requirements for banks, and support for the real estate sector. The People’s Bank of China (PBOC) lowered its seven-day reverse repurchase rate and mortgage rates, while also freeing up more capital for banks to lend. Further measures include increased lending for property acquisitions and potential relaxation of home buying restrictions in major cities. Markets responded with enthusiasm, and the main Chinese share market index leapt 12% in the space of a week.

Source: Grit, Wall Street Journal

In the stock market, the PBoC introduced a swap facility and a re-lending program to support equity purchases. Additionally, a potential capital injection for major banks and special sovereign bonds are being considered to stimulate growth and reduce local government debt. The urgency and breadth of these measures signal Beijing’s commitment to achieving its 5% growth target. 

Between government subsidies and direct payments to households, the stimulus is expected to be at least $420 billion. 

The big question is whether the package will provide a sustainable boost to the economy, or if easier central-bank policy is really what China’s economy needs.

Borrowing costs are already low, yet credit data suggests households and businesses aren’t that interested in borrowing. Consumer confidence is near record low levels, reflecting anxiety over jobs in a weak economy and the cost of the meltdown in property. Barclays estimates that the property crunch since 2021 has incinerated $18 trillion in household wealth, equivalent to around $60,000 per family – a staggering figure, even if somewhat theoretical.

Shanghai Composite Index – last 5 Years

Source: Trading Economics

If you drill into the details of recent Chinese economic data, the picture remains a sea of red. Presented below, this table provides a detailed breakdown of China’s Purchasing Managers Indices (PMIs) from the National Bureau of Statistics. All are heat-mapped based on their percentile ranks across available historical data. Blue is above 50 (signifying expansion), red is below 50 (signifying contraction).

Source: MacroBond

Despite the government’s 5% economic growth target, China’s economy has been encountering challenges in real estate, post-COVID activity recovery, the labour market, demographic challenges, and a loss of confidence both amongst domestic consumers and foreign investors. These issues suggest that the 5% target may not be attainable.

Additionally, the country’s potential growth rates support this concern: the post-GFC trend projects growth falling below 4% in the next 12 months.

Source: MacroBond

Up until the stimulus announcement, Chinese policy makers had done the bare minimum to support growth during the 3-year property-driven downturn. The result was a growing loss of confidence among households, investors and companies in China. The worry has been that expectations get entrenched, causing the economy to tip into a deflationary decline. The best interpretation of Beijing’s strategy is that this has now changed as Chinese policymakers began a more concerted effort to shift opinion and support the economy.

As all are well aware, China’s economic growth rate and the trends within its economy have enormous implications for Australia. As would be expected, the stimulus announcements in Beijing boosted commodity prices and the AUD, although whether this is a sustainable change in direction remains an open question.

Source: Trading Economics