China: What’s next after the fiscal stimulus?

After a major fiscal stimulus was announced at the end of September aiming to boost the struggling Chinese economy, investors have wondered what comes next? We believe that in China, policymakers are mainly focused on mitigating risks in the economy rather than boosting growth. While demand-side measures were largely absent at the latest press conference on Saturday, more hints may follow in the coming weeks. To stabilise the economy on a sustainable basis, measures need to go beyond a short-term stimulus boost and include structural reforms that take longer and are more difficult to implement.

At the press conference of the Chinese Ministry of Finance on Saturday, policymakers gave more indications on further fiscal support measures but did not provide any guidance on their magnitude. The main focus is on tackling the debt issues of local governments and on stabilising the real estate sector.

As such, the central government wants to help the cashstrapped local governments to reduce their debt burden. To stabilise the housing market, local governments should buy back unsold apartments and unused land from developers with the proceeds of special bonds. There has been less focus on ensuring the delivery of already sold but unfinished homes to waiting homebuyers, which we believe would be key to restore the confidence in the housing market as around 80% of home sales are pre-sales. No additional measures to support the demand side of the economy were mentioned either.

Emerging markets continue to perform

Emerging market corporates have performed strongly year to date. The strong performance was led initially by expectations of strong economic data and Fed easing, while the stimulus measures out of China announced in late September further improved risk sentiment and led to more flows pouring into emerging markets, in particular Chinese equities and debt from developing countries excluding China.

Emerging market corporate spreads in all regions are now below pre-pandemic levels, but we believe that there is still room for more tightening in the short term as more details regarding the Chinese support measures become known towards the end of the month.

Any further measures by the Chinese authorities targeting the property development sector could be supportive for Asia and Latin America via higher commodity prices and strong trade linkages. Company fundamentals remain strong, also evidenced by net upgrades finally turning positive (i.e. more rating upgrades than downgrades) in 2024 after almost a decade, while lower new issuance out of emerging markets ahead of the US elections should also be a supportive technical factor.

What does this mean for investors?

As the initial reaction to the fiscal stimulus in China suggested that investors had been caught off guard and were desperately covering their short positions, even the sizeable recent flows into Chinese stocks are more of a reversal than a sign of overconfidence. The fact that policymakers seem to be very reluctant to include concrete numbers in their policy packages keeps the uncertainty alive. This may be due to uncertainties about political implementation, or it may be due to a lack of ‘shock and awe’ announcements in China compared to the US. Yet we remain confident that the current bounce in Chinese stock markets has legs and that policymakers will follow up in due time. So, buying the dips remains the ruling approach in this (tactical) recovery in Chinese assets into next year.

Emerging market spreads continue to remain tight, but we see more room for compression in the short term due to improving risk sentiment caused by Fed rate cuts and stimulus measures out of China. We thus keep our positive outlook on emerging market hard-currency corporate debt, preferring issuers from the Middle East and Latin America, as well as investment-grade Asian debt.