China's currency is constraining stimulus
Chinese equities are attracting attention after officials announced plans to adopt a "moderately loose" monetary policy and a "more proactive" fiscal stimulus approach. The Shanghai Stock Exchange Composite Index (000001.SS) has risen in response. This shift in China's economic policy comes just before the return of U.S. President-elect Donald Trump to the White House.
Investors who are doubtful about China's stimulus efforts are expected to gain more insight this week, as officials are set to unveil more detailed policies during the country's annual Central Economic Work Conference, starting tomorrow, Wednesday.
The potential for effective Chinese stimulus as "limited." what this means for investors, particularly how significant these policy changes may be, or if they may lack substantial impact.
The market was initially excited by the Politburo's recent statement, which echoed support for stimulus through a shift from a cautious monetary policy to a more relaxed one, akin to the post-global financial crisis period. The government has also promised a more proactive fiscal policy. However, cautions that, despite these assurances, China has previously failed to act on such promises. The core issue limiting China's stimulus options, is its currency policy. With China’s currency pegged to the U.S. dollar, any attempt to enact expansive fiscal and monetary stimulus would likely result in challenges, such as a sharp devaluation of the yuan. For China to have a meaningfully implement stimulus, a move away from the currency peg would be necessary—yet this would be a risky step that China's government, prioritizing stability, is unlikely to take.
China Stocks Rise On Latest Stimulus Push
Chinese stocks are rising following the country’s latest push for stimulus. In comparison to previous stimulus efforts. This round the message came from a high-level Politburo meeting presided over by President Xi, signaling the importance of the release. This time, the Chinese government used the term "monetarily loose" for the first time since 2011, suggesting a shift in policy towards looser monetary conditions. Additionally, the release emphasized "proactive fiscal policy," focusing on boosting domestic consumption, which foreign investors have been hoping for.
Although China’s government has made various policy announcements, actual spending has often fallen short of forecasts in recent years. The upcoming China Economic Work Conference may provide more clarity on fiscal targets and policy plans. While specifics may not come until March, the policy direction seems increasingly supportive, with expectations of a 5% GDP growth target for 2025 and a larger fiscal deficit.
Regarding China’s economic outlook, I believes the economy is gradually improving, particularly since September’s PBOC policy measures. While China has avoided aggressive stimulus like the USA uncontrolled "helicopter money," the focus is on structural reforms, particularly boosting domestic consumption, which has been weak since the zero-COVID policy was lifted.
In terms of investment, the geopolitical concerns have been a major overhang, but the performance of Chinese equities, including KWEB, which is up nearly 50% from January lows, is likely to draw more investors back to the market. Despite concerns, the compelling valuations and supportive policies suggest that the outlook for Chinese equities is improving.
Investors are hopeful that this package will provide the follow-through they have been waiting for, but there's still uncertainty about whether it will be enough. Valuations are low, which could lead to more momentum if the stimulus measures gain traction. Potential impact of a Trump administration on China's economic policies. While it's difficult to predict, he highlights the uncertainty in financial markets, with strategists considering various curveballs that could shape the coming year. More rate cuts are possible, but there's also a possibility the US may tighten rates in the latter half of the year, depending on inflation. Overall, uncertainty and the potential for volatility in global markets in 2024.
Chinese Export Volumes Soar
Shifting focus to Chinese exports, the increase in exports since 2023, which are up 7% from last year. This surge may be due to front-loading in anticipation of possible tariffs. Underscores the weak domestic demand and limited consumer sentiment in China. Moreover, rising tariffs could lead to a stronger dollar, further constraining China's ability to stimulate its economy, especially since the country’s growth is highly dependent on exports.
Why Stimulation Now
I was wondering whether, if I were involved in Chinese policymaking, I’d push for stimulus now before knowing what President-elect Trump has in mind, or if I’d wait to see his plan’s details. It seems China wants to act now.
This is a significant move, as it’s the clearest signal yet from Chinese leadership that they are prepared to do more to support the economy. The language used to describe monetary policy—saying it will be "moderately loose" heading into 2025—marks the first change in 14 years. The last time monetary policy was described this way was after the 2008 financial crisis, giving us a sense of how the leadership views the situation.
we should take this as the beginning of more stimulus, as the Politburo—the 24 most powerful politicians in China—has sent a clear message to technocrats, banks, and the finance minister to take further action. More stimulus is expected.
what makes this different from previous iterations of fiscal support? The incremental measures so far have not been as impactful as hoped, which is why the leadership is now moving toward more decisive action. This shift in mindset is necessary after the previous stimulus didn’t deliver the expected results.
In the past, good news from China has boosted European basic resources stocks and luxury goods manufacturers, as it suggested stronger Chinese consumer demand. if Chinese consumers receive more financial support, they will likely spend on luxury goods like LVMH and Gucci. However, the slowing growth in luxury spending has been driven by the property bust and a stagnant stock market, leaving people feeling poorer and less inclined to spend. If the government can address these issues, it could help stimulate spending again.
In conclusion, emphasizes that any significant policy changes from China must be carefully scrutinized, especially in light of the country’s broader geopolitical and economic challenges.
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