China's problems run deep, but policymakers are changing their tone. Experts are taking note but are still wary as previous moves haven't worked. By Reshma Kapadia
Chinese stocks were off to the races on Thursday after Chinese leaders gave investors what stimulus measures earlier in the week failed to do: indications that policymakers are finally alarmed enough to shift out of slow gear to stem a deepening economic malaise gripping the world's second-largest economy.
The iShares MSCI China A exchange-traded fund (ticker: CNYA) climbed 8% on Thursday, while the iShares MSCI China ETF $(MCHI)$, which owns both onshore and offshore stocks, rose 7.8%.
In a rare move, top Chinese leaders at the monthly 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 in the week, the Politburo remarks puts another floor under the economy and suggests a rhetorical shift toward using fiscal policy that investors say is needed to rebuild consumer and business confidence.
"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.
These remarks came just two days after Beijing unveiled its biggest stimulus package since the pandemic that 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 those earlier measures would be enough since the problem isn't a lack of access to cheap credit or liquidity but rather an unwillingness to borrow.
"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," says Andy Rothman, investment strategist at Matthews Asia, via email.
Given the head fakes of the past, China watchers are cautious. "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 Chinese leaders' new comments were 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.
Even though China's lack of follow through has been a pressing issue, "it's hard to overstate the magnitude of the shift this week's announcements reflect in Beijing's mind-set and the tone of their communication," says Phillip Wool, chief research officer at Rayliant Global Advisors.
For investors to add hefty amounts of Chinese stocks to their portfolios, it will take proof of a new approach. That could include specifics on fiscal measures, a plan to help ailing banks saddled with bad debt related to the property bust or meaningful steps to help consumers reeling from wage cuts, job losses, and a decline in their main store of wealth -- property.
Implementation of any fiscal measures -- and their size -- will be closely watched to see if they can turn the tide on household and business pessimism -- and to convince long-term investors to take a closer look. Bank of America economist Helen Qiao says she is looking for Beijing to take the next steps with fiscal measures in the next two to four weeks.
For now, the beaten up Chinese market -- and emerging markets broadly -- has some support as China steps up its easing of monetary and fiscal policies to bolster asset prices and stabilize its economy at the same time the U.S. Federal Reserve and other central banks have shifted into easing mode.
"The only major hurdle to a general boom for China and the wider world may be fears of a further deterioration in the U.S.-China relationship," writes Gavekal Research co-founder Louis Gave. Among the risks: 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.
That sets up an eventful six weeks as investors look for Chinese policymakers to act on their plans, and to see what the U.S. elections deliver in November.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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September 27, 2024 21:30 ET (01:30 GMT)
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