China stimulus measures: what have been introduced and what is the next key catalyst
Overall, the policy announcement since mid-May has delivered targeted and concrete measures to support the economy.
Chaoping Zhu, Marcella Chow
Global Market Strategists
- COVID-19 situation is improving and recent announcements by the State Council and Chinese Premier Li Keqiang indicate further policy support will be expected over the next few months.
- Investor conviction and confidence will be restored when more detailed policy implementation plans and COVID-19 roadmap are announced—this should help unlock equity and bond market performance.
- With Chinese equities trading at discounted levels not seen since 2018, investors will want to be positioned to capitalize on the sentiment driven pick up when a clear pandemic exit roadmap is laid out.
China’s COVID-19 situation and stimulus measures continue to dominate market narrative. In our view, any progress on these two fronts will be the key in unlocking the Chinese equity and bond markets so that investors can regain conviction and confidence.
On the COVID-19 front, Beijing’s outbreak has seen further improvement over the weekend and the city is planning to loosen mobility curbs by resuming most public transportation services while shopping centers outside of controlled areas will also be allowed to reopen with capacity limits. In Shanghai, the city will orderly resume from June 1st and COVID testing rules will be eased accordingly. With production gradually resuming in Shanghai, we expect supply chain disruptions to ease in the coming month. The high frequency tracking indicators are also showing modest improvement in passenger and freight flows throughout May, even though economic activity remains relatively weak. This was reflected in the better-than-expected manufacturing and services Purchasing Managers’ Index data which rebounded from 47.4 and 42.7 in April to 49.6 and 48.4 in May, respectively.
On the policy front, macro policy support has been intensifying since mid-May. After reducing the lower-bound range of mortgage interest rates by 20bps for first time home buyers on May 15th, the People’s Bank of China (PBoC) trimmed its 5-year loan prime rate (LPR) by a more-than-expected 15 basis points on May 20th—the largest cut at the 5-year tenor since the 2019 LPR reform. The lower overall mortgage rate for new loans will likely lift mortgage loan growth marginally, thereby providing relief for both new home buyers and existing mortgage borrowers. This decisive action should help repair the overwhelmingly weak sentiment in the housing market as the move marked one of the strongest signal and action to support the property sector in recent years, particularly as the 5-year LPR is a benchmark for mortgages. This could also provide meaningful support to free up more disposable income for consumption and we expect home sales and credit demand to warm up from June at the earliest.
Moreover, the State Council unveiled on May 23rd a 6-aspect, 33-item stimulus package to stabilize the economy, focusing on:
1) Fiscal policy aspect: Tax cuts, special bonds usage and deferral on social security payments;
2) Financial aspect: The PBoC will double the scale of the loan support facility to small and medium enterprises (SMEs) to encourage banks to defer principal as well as interest repayment on various SME loans.
3) Supply chain aspect: Travel restrictions on trucks from low-COVID-risk areas will be lifted; an additional emergency loans will be provided to the civil aviation industry and bonds will be issued to support the air transport industry.
4) Consumption and investment aspect: Purchase tax cut on passenger car purchases to support consumption; to continue with city specific measures to support basic housing needs and upgrade demand; to support the issuance of railway construction bonds; to roll out new infra projects while banks are encouraged to provide long-term loans.
5) Energy security aspect: Calibrate the coal mine capacity policy while accelerating approvals for important coal mines; accelerate wind as well as solar infrastructure construction; initiate a number of new hydropower and coal-fired power projects.
6) Basic livelihood aspect: Once the situation improves, the mechanism of raising social benefits in line with inflation trend will be promptly activated.
Exhibit 1: Previous vs. current Chinese equity market corrections
Two days later, Premier Li held an unprecedented national video teleconference which was attended by more than 100,000 government officials and stressed some near-term targets for the local governments: 1) stop the decline in economic growth in May and 2) stage an economic recovery in June to achieve positive 2Q GDP year-over-year growth. These positive policy signals helped boost market confidence marginally while ensuring that local authorities give high priority to stabilizing economic growth. However, we believe more policy signals are still needed to regain market momentum.
On regional policies, Shenzhen issued 30 measures to promote consumption and a subsidy for new energy vehicle consumers. Shanghai also announced 50 policy measures over the weekend to boost the economy, aimed at helping enterprises and promoting auto consumption.
Overall, the policy announcement since mid-May has delivered targeted and concrete measures to support the economy. While the market is awaiting a more elaborate implementation roadmap with regards to the announced measures, the investors are also anticipating more pro-consumption policies at the regional and local level, such as subsidies or vouchers that are partially funded by the central government to boost goods and services consumption.
On the positive side, we see that the policy priority has now pivoted back to supporting economic growth. Furthermore, as the COVID situation continues to improve, we expect a gradual economic reopening in the near term and further normalization afterwards. We believe the downside risk is limited but the market may remain volatile until a clear pandemic exit roadmap is laid out.
Meanwhile, the +50% recent correction saw MSCI China’s multiple contract 37% from the January 2021 peak, leaving current valuations below China’s 20-year average. This de-rating means investors have not had an opportunity to buy Chinese equities at such a discount since the late 2018 correction. Relative to other markets, Chinese equities now offer a near record discount to U.S. equities of 39% (nearly double its average discount of 23%). Given the global regime change in monetary policy, valuations matter again and global investors are starting to be enticed by discounted Chinese valuations (in addition to its higher potential long-term returns). There may be more earnings downgrades in the period ahead and around the 2Q earnings season. However, opportunity will emerge once the current round of earnings downgrades are largely done.