China’s Latest Policy Push in Perspective

After China’s deep domestic bear market (protracted equity market decline exceeding -20%) and months of speculation amongst commentators we follow and disappointment about possibly huge government stimulus that failed to materialise, Chinese officials announced a raft of monetary, equity market and fiscal measures in recent days.^[i] The initial reaction was more scepticism, based on our observations, as we found many doubters arguing it looked insufficient to spur economic growth and arrest Chinese stocks’ slide. But as more announcements emerged and references to fiscal measures grew, we found sentiment warmed, boosting local markets and global stocks exposed to Chinese demand: copper, gaming, luxury brands and those exporting into China.^[ii] Headlines we read are hyping the effects, but they may prove fleeting. Regardless, we think most miss a simple point: Whilst uncertainty surrounding Chinese stocks remains high, its economy is and was chugging along fine, adding to global demand, stimulus or no.

China’s support measures, which have come out in drips and drabs for over a year, largely sought to put a floor under the country’s long-running property downturn.^[iii] This included efforts to backstop local government finances, strained by a lack of property sales and associated revenues. But then alarm spread to state-owned banks, whose price-to-book ratios (stock price divided by total net assets per share) plunged. The government went back to the well with plans to let local governments refinance debt more easily. But that didn’t stop perceived pressure on real estate, either. It all seemingly culminated in July’s Third Plenum, widely watched for a huge stimulus bazooka. When it produced mostly vague chatter—a nothingburger—we saw investors’ already frail hopes sink.

Enter last week’s announcements, which we think caught prevailing pessimism off guard. Though the measures were announced piecemeal, we have seen new China bulls say in publications we follow they combine to a big-enough policy response to drum up demand and speed moribund growth.^[iv]

The initial monetary measures elicited little enthusiasm. These included:^[v]

• A half-percentage point reserve requirement ratio cut, freeing up more reserves for banks to lend
• A two-tenths percentage point reduction in short-term lending rates
• Lower down payment requirements on second homes
• Mortgage rate cuts on existing homes
• A market stabilisation fund providing 800 billion yuan ($113 billion) of liquidity support for institutional investors to buy beaten-down stocks

But in the following days, fiscal measures emerged:^[vi]

• 2 trillion yuan ($284 billion) in special sovereign bond issuance
• Half the proceeds to boost consumer demand
• The other half to shore up local government and bank finances (a de-facto recapitalisation)
• A pledge to deploy “necessary fiscal spending,” including direct household support, to meet economic growth targets
• Meanwhile, top cities like Beijing, Shanghai and Shenzhen are lifting lingering home-buying restrictions—e.g., eligibility requirements to curb speculation, limits on the number of homes people can buy and constraints on non-locals buying in popular cities

There are sound reasons for scepticism about the measures’ effectiveness, in our view. As many commentators we follow noted, earlier monetary easing and down payment assistance over the last two years failed to arrest sliding home prices. Moreover, market stabilisation efforts can stoke more panic than calm, as they raise uncertainty about how and when emergency facilities unwind.

The fiscal measures appeared to stand out most to us, though, signalling Beijing’s intent to finally put long-running household demand and financial fragility fears to rest. The new large-scale debt issuance greatly expands—nearly 7 times—the 300 billion yuan of special issuance announced in July.^[vii] Consumer stimulus programmes like a goods trade-in scheme designed to stimulate “fridges, not bridges” consumption now look likely to be scaled up considerably.^[viii] This seems to suggest policymakers’ penchant for supply-side support—e.g., promoting advanced manufacturing to generate growth—is shifting to focus more on demand.

Furthermore, plans to issue sovereign debt to also fund a large-scale bank recapitalisation show us Beijing backing is now talk with action, making implicit state backing explicit. Not that there was really any question, in our view. But we think it should be abundantly clear at this point that Chinese banks have the resources to expand credit AND absorb losses.

For markets, though, we don’t think such stimulus announcements are fundamentally game changing. Officials’ acting to hit their stated growth targets shouldn’t be stunning, in our view. Yet all the fanfare over last week’s policy pushes suggests a deep sentiment disconnect. Exhibit 1 shows hope springs eternal, with Chinese stocks up 36.1% from their 9 September low—catching eyeballs and bolstering views Beijing’s cumulative response is the real deal. But China has seen such countertrend moves before. Notably, even given Chinese banks’ recent leap, they are still trading below half book value.[ix]

Exhibit 1: China’s Bear Market Running on Three Years

Source: FactSet, as of 3/10/2024. MSCI China returns with net dividends in yuan, 2/10/2019 – 2/10/2024.

Furthermore, and crucially in our view, stimulus goes only so far. It can’t answer a crucial question for Chinese stocks: Is the government shifting to bolster growth and quiet the regulatory uncertainty that we think contributed to the long-running panda bear market?

We think that is a thorny question for those inclined to bottom fish Chinese markets. But we don’t think global investors have much need to answer it. Whilst we don’t think China’s economy required stimulus as desperately as commentators we follow commonly argue, hyping overwrought “deflation” themes, these measures should be a modest tailwind to already better-than-appreciated growth. We think that should keep China, the world’s second-biggest economy, contributing to global economic growth and may prove a broad-based tailwind to sentiment, as we have found investors have long harboured fear of an impending hard landing in the Middle Kingdom. But, in our view, thinking these moves are somehow game changing amidst an ongoing global bull market is taking it way too far.