Amy Xie Patrick: China’s silver bullet ahead of Golden Week?

Here’s what you need to know about the latest stimulus announcements in China, according to Pendal’s head of income strategies Amy Xie Patrick

• China allocating RMB2trn to “big bazooka” stimulus
• Issues can be fixed, but China needs to spend more
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE final week of September was an eventful one in Beijing.

China’s central bank, the People’s Bank of China (PBoC), kicked off proceedings by lowering a key policy rate by 0.20% and reducing the required reserve ratios (RRR) for large banks by 0.50%.

This was swiftly followed by announcements of a slew of other stimulus plans and measures aimed at lifting China’s ailing economy.

Since then, there has been much talk of China’s “big bazooka” stimulus.

Some think that policymakers have made a commitment to do “whatever it takes” to rescue growth. With China on holiday this week for National Day (国庆节) and Golden Week (黄金周), this article explores whether this stimulus will be a silver bullet or simply a handful of mood-boosters.

This time is different

There are several key differences between this slew of measures and what we’ve witnessed over the past two years of “policy incrementalism” from Beijing.

The measures are broad and more coordinated, addressing everything from financial system stability to the longer-term demographic crisis.

They have also been communicated with a greater tone of urgency and determination, strategically timed to boost sentiment during the current week-long national holiday.

Most importantly, there is finally a willingness to directly address the struggles faced by Chinese households as a result of the property crisis.

The bursting of the Chinese property bubble is akin to the Global Financial Crisis (GFC) for the world’s second-largest economy.

In fact, had the rest of the world followed the same fiscal austerity as China in the wake of Covid, this crisis would have developed its own acronym by now. We would be blaming that acronym for a global recession.

When such a crucial driver of growth and wealth creation suddenly shuts off, it leaves holes in balance sheets and chasms in sentiment.

The private sector will focus on balance sheet repair as its priority, which means no amount of making borrowing cheaper and more available can stimulate activity during this phase. As a result, the government must spend and invest to plug the hole.

China’s issues can be fixed…

At the heart of China’s economic struggles are three key ailments.

Firstly, as already discussed, the economy needs to recover from the property crisis. This process takes time, and the first job of authorities during this time is to make sure the crisis doesn’t take down the entire system.

The interest rate and RRR cuts announced in late September help to ensure that the banking system has plenty of liquidity.

The capital injection programs are to ensure that troubled but important banks do not infect the rest of the system with their problems. Very similar actions were taken in the US after the collapse of Lehman Brothers in 2008.

The next job is to stabilise prices in the housing market. The supply-demand imbalance of China’s real estate market is due to both oversupply (from over-building) and insufficient demand (partly due to lack of affordability).

Second is a lack of a social safety net, which results in households saving far too much. This has only been exacerbated by the negative wealth effect of the housing bubble bursting.

Fiscal measures that make childcare, health and retirement more accessible and affordable will naturally bring down saving and encourage more spending, thus naturally transitioning the economic engine from investment to consumption.

Lastly, an unprecedented demographic crisis looms large, thanks to the one-child policies introduced in the late-1970s. While this policy was officially abolished in 2016, birth rates have failed to rise meaningfully in China due to the social infrastructure having been rewired for over a generation to cater to one-child families.

Add to this that many Gen Z-only children with hard-earned degrees can only find Meituan bike delivery jobs, it’s quickly obvious that birth rates won’t turn around by themselves.

All three problems are intertwined and can be solved with appropriate incentives and policies.

A stronger system of social safety nets, including cheap and affordable childcare, coupled with free homes for families willing to have more children would go a long way to tackling these fundamental issues.

…but they’ll need to spend a lot more

The newest set of stimulus measures circle up to RMB2trn for fiscal measures directly targeted at households and consumers. Measures include monthly cash subsidies to families who are willing to have more than one child.

While it’s a step in the right direction, the quantum of funds earmarked for these measures is not going to be nearly enough.

In addition, there are likely to be significant hurdles to implementation, all while the market awaits eagerly for signs that this “bazooka” stimulus is making a meaningful difference to China’s economic trajectory.

Incentivising parents (who are only children themselves) to have more than one child is going to be costly business – so is establishing a larger and more equitable social safety net for the masses.

While RMB2trn is not small, it is at least five times too small to be of long-lasting consequence.

Rather than a silver bullet, the latest slew of Chinese stimulus plans are about providing a floor under market prices and sentiment. Mood-boosters are nice, but the economy needs more than just sugar hits if Beijing wants a better and more sustainable growth trajectory.

Implications for portfolio positioning

Since there are significant departures in the latest wave of stimulus announcements, Chinese assets have responded dramatically – with the CSI300 equity index up nearly 30% over the past week.

Bear in mind that with the almost halving of the value of this market since its peak in 2021, the recovery may still have legs in the near term.

There is also speculation that the significance of China’s stimulus could lead to global reflation. I don’t yet buy into this argument.

As mentioned earlier, these measures are a step in the right direction, but lacking in details and firepower. The medium-term risk to markets is a slow path to implementation, resulting in little to no change in Chinese data over the next few months.

It is also notable that despite the rally of onshore Chinese assets, broader asset classes have yet to buy into the idea of reflation. Oil, for example, had continued its slide until geopolitical developments in the Middle East caused a temporary price surge.

In short, this round of Chinese stimulus is good news for investors who are directly involved in Chinese assets. But our portfolios are reluctant to get sucked in to “China-adjacent” positions.

Our income strategies welcome the buoyed sentiment to risky assets but are not relying on a quick translation from rhetoric to Chinese data to justify our exposures to equities and emerging markets.

The uneven spread of market reactions to this latest news from China also serves as a healthy reminder that dislocations and uncertainties naturally grow when the global economic cycle slows.