The world’s second-largest economy is attempting a turnaround—will it work?
A swath of mixed and modest U.S. economic data released this week painted a picture of an
economy that is making a soft landing but is softening as it does so. Reports on inflation, housing, manufacturing, spending and consumer confidence all colored the canvas. In addition, a mighty strong earnings report from semiconductor giant Micron set the tone for chip earnings thanks to its broad exposure to industries dependent on the tiny powerhouses, including data centers, phones and personal computers. Micron credited AI for its strong results, which has kept fuel under the tech sector’s continued fire into month-end.
But the biggest news this week was the “shock and awe” $142 billion stimulus program China’s central bank announced on Tuesday, which is designed to pull the economy out of its deflationary funk and back towards the government’s growth target. The CSI 300, the nation’s benchmark index, surged to its highest level since July 2020—needed relief as the CSI had been down a whopping 40% from its 2021 peak. In fact, it has been an open question whether China is even investable following years of poor market performance, waning growth and dubious economic data.
As I write this, I am well aware it was also revealed this week that leading Chinese economist Zhu Hengpeng, who worked at the government think tank the Public Policy Research Center, has reportedly disappeared after being disciplined for criticizing President Xi Jinping in a private WeChat group. He has not been seen since April. Yikes.
Turning to the details of the stimulus announced, the People’s Bank of China (PBoC)—the central bank of the world’s second biggest economy—unleashed a triptych stimulus package aimed at spurring consumer spending to counter persistent deflation.
First, they unveiled a policy interest rate cut of 0.2% on the seven-day reverse repo rate combined with a lowering of banks’ reserve requirements and the cutting of existing mortgage interest rates, both by 0.5%. For the PBoC to unveil three rate cuts at once is itself unprecedented. They also floated a potential 0.25% or 0.50% further cut to reserve requirements before the end of the year. This is remarkable in that the PBoC hasn’t historically dabbled in forward guidance.
But that’s not all. The PBoC announced plans to inject more liquidity into the stock market by refinancing bank loans to help firms buy back their own shares. It will help institutional investors, such as securities companies, raise funds by allowing them to borrow liquid assets using their own stock holdings as collateral. The package included a cut in the minimum down-payment requirement on all types of homes to 15%. Finally, the PBoC will allow commercial banks to use 100% of the funds from the 300-billion-yuan relending loan facility to finance loans they offer to help state-owned firms acquire unsold flats for affordable housing.
The purpose of all these unprecedented maneuvers is to jumpstart a moribund economy. Yet, while the PBoC measures may provide some relief, experts are pessimistic they alone will get the Chinese economy humming again. Detractors note that support for the stock market is not terribly important given the Chinese economy is not very financialized and only some 10% of Chinese citizens hold stocks (as opposed to 70% of Americans). In contrast, real estate accounts for up to 80% of China’s household wealth, as well as 30% of GDP.
Other critics cite the measures as not going far enough to stimulate the consumer, which many believe would be the key to unleashing the full potential and growth opportunity of the Chinese economy. Finally, there are concerns that, based on prior experience following similar “shock and awe” announcements after 2008 and in 2020, the execution and uptake will fall flat and end up sparking inflation or further compound surging levels of debt.
We shall see. Perhaps the most important thing about the announcement is that it signals a greater sense of urgency around supporting the economy than before. In a global marketplace, that was a positive for the markets this week, maintaining their momentum through a historically tricky seasonal period.
Some clients want to know if China’s move signals a buying opportunity. We would respond by saying our investment plans with you typically weave in exposures to diversified markets, including China and other emerging economies, though in measured amounts given the risk and higher volatility. It is also true that, as primarily U.S.-stock-market investors, you are shareholders in multinational companies with revenues coming from Asia and Europe, as well as the U.S., and will benefit from these actions.
Bottom line, interest rates declining across the globe and stimulus efforts from China are supportive to the broad markets, and we need it as we head into election season and steer through a modest economic soft patch and navigate a higher market bar thanks to current valuations.
Thank you for your interest in our weekly investment commentary. If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).