By Reshma Kapadia
Chinese stocks were off to the races again on Thursday after Chinese leaders gave investors what stimulus measures earlier in the week didn't: Indications that policymakers are shifting away from an incremental approach to stop a deepening economic malaise that has set in. The iShares MSCI China A exchange-traded fund (ticker: CNYA) rose 8% on Thursday, while the iShares MSCI China, which owns both onshore and offshore stocks, rose 7.8%.
Top Chinese leaders at the Politburo meeting vowed to deploy sufficient fiscal spending to ensure the economy meets the official 5% economic growth target for the year -- a target that analysts said was in jeopardy as property prices have continued to fall and deflation sets in.
For strategists lukewarm about the interest rate cuts and other stimulus measures unveiled earlier this week, the Politburo remarks suggested a rhetorical shift toward using the fiscal policy that investors see as needed to repair falling consumer and business confidence as the economy sputtered.
"Gone is the equivocation on deleveraging, moral hazard, and provincial indebtedness, a staple of previous Politburo meetings," writes BCA Research chief strategist Marko Papic. "This is Beijing's 'Whatever It Takes' moment."
The meeting's minutes included calls to increase the scale of monetary policies, halt the decline in the real estate market, and promote stabilization and expand loan issuance to certain property projects.
The remarks came just two days after Beijing unveiled its biggest stimulus package since the pandemic. Those measures included the People's Bank of China cutting policy interest rates further, reducing existing mortgage rates by half a percentage point, and increasing loans to local governments to buy some of the excess inventory of property that has hampered a recovery.
Fund managers and analysts were skeptical the stimulus unveiled Tuesday would be enough. The problem, they said, isn't a lack of access to cheap credit or liquidity but rather an unwillingness to borrow.
But the Politburo remarks included commentary about the government doing more to stabilize the property market and support household consumption -- a sign that the urgency is seeping in.
For Matthews Asia investment strategist Andy Rothman the remarks were an important step because they show that Xi acknowledges the severity of the decline in economic activity, especially real estate.
"The good news is that Xi's thinking seems to be moving in the right direction, and as he recognizes that he hasn't yet done enough, he is likely to soon fully overcome his stubbornness and deliver the rhetoric and policies that will rebuild trust among China's entrepreneurs and consumers," Rothman says via email.
Given the head-fakes of the past, caution is warranted still. "The real question is where does this leave the real economy? It could help the housing market find a cyclical bottom in the coming months but will do little to really jump-start consumer spending, especially in the way foreign companies selling to Chinese consumers need," says Shehzad Qazi, managing partner at independent research firm China Beige Book. "This is mostly about vibes for now."
But the remarks on the back of stimulus and just a week after the Federal Reserve cut interest rates, creating a more favorable backdrop for riskier assets, is enough to spark a rally. "The global macro world may be witnessing a coordinated policy stimulus akin to the 2015-2016 period. Our bet is that we are at the start of a major rotation out of U.S. assets," Papic writes.
Many investors have cut China holdings significantly in the last couple of years amid the economic slowdown and geopolitical tensions. The shift in rhetoric will likely push some to reduce their underweight positions, providing a rally some fuel in the near-term.
But for investors to add hefty amounts of Chinese stocks to their portfolios, it will take proof that policymakers are changing their approach. "The key is implementation and size of a fiscal push," says Rory Green, head of China research at TS Lombard. "While there are strong rumors [about plans] accompanying the political rhetoric, China has disappointed many before so caution is needed on what it means for the underlying economy, even if stocks will run higher on stimulus promises alone."
Even then, plenty of other problems stand in the way of economic growth -- and a sustainable stock rally. Among them: the risks of a trade war with the U.S., the threat of 60% tariffs if Donald Trump is elected president, and China's retaliation against U.S. companies.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 26, 2024 10:51 ET (14:51 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments