- The Politburo and PBOC have signalled a strong commitment to rebooting the economy, with a range of monetary and fiscal measures, though the size of the stimulus is unlikely to match the scale of a decade ago.
- Market reactions to China's recent announcements indicate an expectation that stimulus measures will meaningfully impact economic growth in the short-term.
- While some analysts are optimistic about short-term growth, others remain sceptical of the long-term effects on consumption and structural issues, given China’s demographic trends.
Strong positive market reactions to China's recent stimulus announcements indicate an expectation that these measures will meaningfully impact economic activity of our largest trading partner. The People's Bank of China (PBOC) and the recent out-of-cycle Politburo meeting both signalled an intent that mirrors European Central Bank President Mario Draghi's 2012 declaration to do "whatever it takes" during the European debt crisis. These actions reflect a strong commitment to stabilising China's economy, with commodity prices rising and shares in resource companies and Asian markets showing positive momentum.
Analysts are still digesting the extent of China's latest measures, which include rate cuts, the issuance of trillions of yuan in bonds, and steps to recapitalise banks and rescue local governments. While the scale of these efforts may not reach similar magnitude seen a decade ago, they indicate a clear recognition that the economy requires a reboot. China's leadership is focused on driving government investment, issuing long-term special treasury bonds and local government special bonds to fuel economic growth. These actions suggest a pivot in policy, aimed at countering economic slowdowns through a mix of monetary and fiscal adjustments.
This activity was summarised by a commentator who noted that China may have reached a major pivot point, where the emphasis on counter-cyclical policy adjustments could drive growth in the near term. The Politburo’s statement on increasing fiscal and monetary intensity, along with measures to clear bottlenecks in stock market access for social security and insurance funds, signals a broader strategy to stabilise financial markets. Beyond financial markets, the government is also focused on boosting domestic consumption by addressing employment issues, which is critical for long-term economic health.
On the labour market front, China has introduced new guidelines to encourage high-quality employment. These include tax incentives for businesses, social security rebates, and tying employment conditions to the key performance indicators (KPIs) for government officials. Additionally, provinces with weak labour markets will receive earmarked funding to support job creation. These policies reflect the government's recognition of the importance of employment in sustaining domestic demand and economic stability.
Despite the positive market reactions, analysts hold mixed views on the efficacy of these measures. Some believe they could provide a short-term boost to economic growth, particularly by spurring investment and stabilising key sectors. However, others are more cautious pf these policies, highlighting structural economic issues, such as China’s aging population and slowing domestic consumption, as limitations on their effect in the long term.
Shanghai skyline photographed by Øyvinn Rimer
Whilst not confirmed by Chinese policymakers, we have seen unnamed sources comment in media that one of the policy initiatives being planned is one where Chinese families with two or more children will be awarded a monthly cash payment of RMB800 (~NZ$180) per child (excluding the first child). If this policy is implemented, it could potentially impact positively on the birth rate and on household budgets of young families. This could then benefit companies like a2 Milk which has a direct exposure to baby nutrition in China.
Across the ditch, the market exposure to China stimulus is more significant, with resources being sensitive to any potential pick-up in industrial activity. Iron ore, base metals, and coal are all levered to Chinese economic activity. Over time, a possible increase in Chinese consumption could see increased demand for both soft commodities (i.e. NZ dairy products), consumer goods and even stronger tourism flows to Australia and New Zealand.
While the challenges ahead for China’s economy are significant, the coordinated efforts of the PBOC and Politburo suggest that growth will likely see short- and medium-term gains. The equity market, which has been sitting on the sidelines, could now see a resurgence as momentum builds. Resources companies and sectors tied to China’s economic recovery may also benefit from these policy measures, as the weight of financial inflows potentially drives further market gains. In the short term, at least, the central bank and government’s commitment to stabilization appears poised to deliver meaningful results.
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