For quite some time now, Chinese economic activity has been disappointing, slowing to its worst growth rate in 2 years. Additionally, China has experienced 5 consecutive quarters of deflation which is the longest stretch of contraction in prices since the late 1990s. There has clearly been a crisis of confidence among businesses and consumers holding back spending and investment. Up until now, the government has been reluctant to act aggressively, but on Tuesday that may have changed as Pan Gongsheng, China central bank chief, and others rolled out a broad-based stimulus package.
The new set of measures was really three-fold. They cut interest rates and reduced reserve requirements for banks to increase market liquidity, provided bigger incentives to purchase homes hopefully increasing investment demand, and pledged equity market support with the possibility of a stock stabilization fund. This is a step in the right direction, but is it enough? Many China experts agree that Beijing must do more to fundamentally revitalize the economy with structural debt and demographic headwinds.
For now, these moves add to the growing list of global central banks easing headlined by the US Federal Reserve. Stocks, and more specifically Chinese and emerging market stocks, are excited about China joining the party. iShares China Large-Cap ETF (FXI) rose 9.83% yesterday, which was the second largest 1-day gain since the great financial crisis in 2008. Emerging market indices also soared close to 4% obviously aided by China, which is the largest country weight in the index at 24%. Chinese and emerging market equities remain relatively cheap, and we are seeing some early evidence of earnings improvement, but we have been waiting for a catalyst for better performance. Maybe, just maybe, China is providing one?
Source: stockcharts.com, as of 9/24/24
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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