China Stimulus Explained and Investor Implications

Today we want to take a deeper dive into the China stimulus announcements. The announcements are the strongest and most coordinated policy stimulus package that we've seen in recent months in China and definitely a pivot away from the drip feeding measures that we've seen in the past. We've seen equities in China rally on the back of that, particularly in light of very low positioning in China, as well as these more supportive policy signaling measures.

Initially late September we saw several things announced, including a PBOC easing package, including bringing down the required reserve ratio, and also easing restrictions on mortgage financing. And then to our surprise, we also saw some facilities particularly directed towards supporting the equity market, which is something that historically was dismissed as a lower priority. So that obviously was very positive for the equity market. And then on top of that, we also saw some measures that were directly geared towards boosting consumption and providing sort of handouts to certain segments of society, which again is a shift from the past because before a lot of these measures would have been considered welfareism and we do need consumption and confidence in China to pick up for the economy to recover. As I mentioned, the market rallied, and expectations started increasing on the stimulus.

And people were really looking to see beyond these measures what sort of fiscal support is going to be provided by the government to address some of the longer term structural headwinds like the local government debt and also just the housing market which the government mentioned they are keen on stabilizing. But we were very excited to see a shift towards battling deflationary pressures and moving the economy again on an economic recovery path.

Over the weekend, we actually saw a highly anticipated press conference by the Ministry of Finance in which people and the market was really looking to see what sort of fiscal support measures will be provided and ideally the scale of that fiscal support.

While the Ministry of Finance did not really provide a specific number on the size of the fiscal support, which was disappointing to some players in the market and led to profit taking in the market over the last day or two, because as we mentioned, there was a very strong rally ahead of that, we actually walked away from the press conference feeling more constructive because we saw that the Ministry of Finance has signaled very strong commitment to addressing some of the key structural issues in China. One is really engaging in debt swaps with local governments to address the big issue of the hidden local government debt and how that has been constraining growth at the local government level. And they indicated that there is ample room by the central government to actually provide such support to local governments and that's key to get China back on a more sustainable recovery track. The other area that they've also provided very strong signaling of support towards is the housing market. And they mentioned something related to the government potentially buying up some of the inventory that's floating around in the market and weighing heavily on the housing market in China. So you can think of this as some version of Chinese tarp.

And if that actually happens and happens at the right scale that could put China on a more sustainable recovery path which would be very positive for the economy in China and for the emerging market equity asset class overall.

In addition to that, we think that this will also be supported by further monetary easing measures by the PBOC and also strong recapitalization of SOE banks, which is helpful again as tools for further stimulus and further support. So while this is very positive for China, we also think this is positive for the asset class overall, because if China does get on a sustainable recovery path, this will have positive implications for commodity prices. This is helpful in the case of countries that are resource rich like Brazil, like South Africa and other pockets within the EM asset class. And it's also positive for emerging market equity flows, which definitely could support market performance in the asset class going forward. So from here, where do we go? We have to look out for further announcements on more specific and detailed fiscal support measures and the scale of that support going forward. And we believe that while

The rally that we've seen was quite exciting. It also was kind of a “buy everything” China rally, which is now somewhat subsiding.

Going forward, we think selectivity is going to be key. And we think that our strategy of bottom-up stock picking and really trying to figure out which companies will come out of this as winners is an appropriate and very exciting strategy for this kind of environment going forward.