Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
After months of weak economic data and growing concerns over missing this year’s growth target, the urgency for aggressive policy support in China reached a peak.
Following last week's 50bp rate cut from the Fed and the resulting strengthening of the yuan, the People’s Bank of China (PBOC) now had a window to ease monetary policy without worrying too much about currency stability.
And they did!
Importantly, rather than implementing gradual, smaller easing measures, the PBOC took a more aggressive approach, announcing a series of bold moves aimed at stabilizing both the economy and the stock market.
PBOC Governor Pan Gongsheng has unleashed a “stimulus blitz” – a coordinated set of policies intended to tackle economic headwinds. Here's what the PBOC rolled out:
The PBOC’s measures go beyond just interest rate cuts. By lowering the reserve ratio, adjusting mortgage terms, and providing liquidity support for stock buybacks, the central bank has signaled its commitment to supporting various parts of the economy:
While these moves are impressive in their scope, they raise several questions about sustainability.
There is no silver bullet that can bring China back to the double digit growth levels markets have been used to. There is no single policy step that will resolve China’s structural issues of debt, deflation and demographics. But the direction of travel is encouraging, and this can help to repair some of the confidence levels in the economy and policymakers.
What is still needed is execution of the announced measures, coordination from other policies particularly on the fiscal side, and more follow-up measures to continue the momentum.
Investors, burned by previous false starts, may remain cautious. However, with valuations at attractive levels, signs of stabilization could lure buyers back into the market. There’s plenty of money on the sidelines waiting for more concrete signs of recovery.
Another major risk that could counterbalance the positive effects of these stimulus measures is the upcoming US elections and the potential for increased tariffs on China.
China's stimulus measures can have a wide-reaching impact across different asset classes globally. Here are key assets that typically respond positively to Chinese stimulus: