Last week, the People’s Bank of China unleashed a broad package of monetary stimulus to address the country’s slowing economic growth. This included 20% – 30% cuts in key policy rates, an increase in liquidity in the banking system, and a downward adjustment of existing mortgage rates aiming to reduce the interest burden on households. In addition, measures were announced that seek to boost consumption, pledging to increase fiscal spending. 

We highlight the key implications of this stimulus package for the Chinese economy and various asset classes:

• China growth: The combined set of policy easing measures announced thus far, as well as the commitment to providing further support, are welcome steps towards increased policy support for the struggling economy. However, the concrete measures announced so far are likely to have only a limited impact on the real economy.
• China property: The step up in policy support is unlikely to boost buyer sentiment. More easing measures are needed to address the supply-demand imbalance.
• Currencies: The euphoria-driven strengthening of the Chinese yuan may fade if there are few signs of economic improvement.
• Fixed income: If the policy measures do not result in a turnaround of the economy, the global bond market will see little impact from the events.
• Asian credit: We remain selective in China, sticking to the investment-grade segment, and selective in high yield, while still avoiding Chinese property bonds given the poor outlook.
•  Equities: Equities linked to China have rallied on the news and on the more optimistic outlook, although a large and effective fiscal policy follow-through is needed for a sustainable recovery.
• Commodities: While China’s economic wellbeing is key for the prospects on commodity markets, we do not see a game-changing moment.

China equity strategy: The bounce extends

We expect the tactical rally in Chinese equities to extend. Equity investors believe China has reached the turning point of a major policy shift. The earlier-than-expected Politburo meeting reflects top leaders’ much stronger sense of urgency in rescuing the faltering economy. In our view, the current set-up is analogous to late 2022, when China’s rapid shift to reopening, combined with a depressed valuation and positioning, lent support to a strong equity rally. 

The reality may well disappoint, as there are many constraints that may limit the scale of the actual fiscal stimulus. Nonetheless, Chinese markets often trade ahead of the actual policy announcements. For a sustainable rally to take place in China, however, investors will demand to see a much larger fiscal stimulus, comprehensive solutions to address home inventory, and a normal incentive mechanism restored. 

What will it take to have a lasting impact?

For the Chinese economy, the concrete support measures announced so far are welcome first steps but will do little to address the underlying demand problem in the economy. Increased credit supply and lower borrowing costs are unlikely to revive credit activity in an environment of low consumer and business confidence amid the sharp and ongoing downturn in the property sector, uncertain income and employment prospects, and deflationary pressures. 

The stabilisation of the property market, more accommodative fiscal policies, and sustained income support for households are essential factors in improving the demand in the economy. In our view, ensuring the delivery of pre-sold but unfinished homes would be key in stabilising the property sector and restoring confidence in it. One-off consumption measures, if large enough in size, can indeed temporarily boost consumption and growth. However, in order to increase domestic consumption on a sustainable basis, fiscal support for household incomes needs to go beyond one-off transfers and rather come through improved pension and social security systems.

What does this mean for investors?

A ‘whatever it takes’ moment or ‘too little, too late’? Markets are taking a ‘buy now, ask later’ stance towards China after the stimulus news. We reiterate the tactical buying opportunity for Chinese stocks and recommend waiting for further news about size and timing before turning positive on clear China beneficiaries, such as Europe and the commodities complex.

For now, we maintain a tactical Overweight stance on Chinese equities. Turning points are the hardest to deal with in financial markets. The dilemma for investors is always how to judge whether policy measures are sizeable and timely enough to make the tide turn – and how long the boost may last.