Will China’s stimulus move the needle this time?

Hi, I am Gabriela Santos, Chief Market Strategist for the Americas at J.P. Morgan Asset Management. Welcome to the On the Minds of Investors. Today's topic is "Will China’s stimulus move the needle this time?" Chinese equities had a spectacular end to September, with the MSCI China up 21% from September 24^th to 30^th. The catalyst was the announcement of a series of economic stimulus measures focused on the housing market, domestic consumption, and the stock market. China has implemented similar policies with limited economic effect. However, this time was different: the measures were coordinated across monetary, fiscal, and financial regulators and summed up to the largest stimulus since 2015. After the lowest nominal growth rate in twenty years, Chinese policymakers have found a new sense of urgency to boost economic momentum. Will this stimulus move the needle for China’s economy and market? China’s equity market has had short-lived recoveries in the past, thus investors should look for: more demand-side fiscal measures, improvement in domestic confidence, and structural policy reforms. Whether China’s recent easing changes the strategic outlook for Chinese equities remains to be seen, but the focus from its policymakers on managing the growth downside is supportive for international equities which are more exposed to China’s economy.

Measures announced by Chinese policymakers were multi-faceted:

• Monetary policy: Cuts to lending rates and existing mortgage rates, as well as bank reserve requirements. Six large banks were injected with additional capital.
• Property market: Reduced downpayment requirements for second home purchases (now unified with first homes). Creation of relending facility to support the purchase of unsold homes by regional state-owned companies.
• Stock market: Creation of swap facility with securities brokers and insurance companies to fund stock purchases. Study of specialized refinancing facility for listed companies to buy back shares.
• Fiscal policy: Policymakers could increase the fiscal deficit to reduce taxes, increase spending and allow for more fiscal transfer from the central government to local governments. 

Once Mainland Chinese markets reopen on October 8^th after the National Day holiday, investors will look for more details on these measures. In the past two years, rate cuts and liquidity injections have yet to boost credit growth or economic activity due to cautious sentiment by households and the corporate sector. The question now is whether these more forceful measures move the needle. To gain more confidence, investors should look for: 1) National Day tourism and consumption numbers to get an early glimpse of whether sentiment has improved, 2) more announcements on the fiscal side, especially focused on the demand rather than supply-side, 3) additional policy steps to deal with structural (not just cyclical) headwinds for China’s economy, and 4) spillovers to trade and capital flows from the U.S. election.

China’s market rally over the past week shows what depressed valuations, low investor positioning and a policy catalyst can do. Since 2022, Chinese equities have had similar rallies: +60% October 2022-January 2023 and +33% January-May 2024. China’s forward price-to-earnings ratio has now moved higher from 9.1x to 11.0x today, in line with its 20-year average. From here, economic and earnings momentum will need to improve for China to go back to being a strategic rather than merely tactical investment. However, more broadly, China’s easing plus global central bank monetary easing, is supportive for global risk assets – and gives investors more confidence in international markets more exposed to China’s slowdown, such as European and Asian equities.