China’s biggest stimulus since the pandemic has boosted equities, but it may fall short of pulling the economy out of its slump.
Chinese equities have surged in recent weeks, following more than three years of a bear market, as China recently unveiled its biggest stimulus since the pandemic, aimed at pulling the economy out of a slump and back toward its growth target. But global investors now face the question: Will it be enough to ease the country’s deflationary debt spiral and reinvigorate growth?
The package announced in recent weeks is ambitious. The People’s Bank of China cut bank-reserve requirements, which leaves banks more cash available to lend to businesses and individuals. It also lowered interest rates, as well as reducing mortgage rates and minimum down payments on second homes, to help stabilize home prices and spur demand. Finally, policymakers committed hundreds of billions of yuan to provide liquidity support for markets and to help local governments spur job creation and household consumption.
Equity markets cheered. The MSCI China Index, having been down some 60% from the beginning of 2021 to March 2024, soared nearly 40% between mid-September and the first week of October before settling down to a roughly 20% gain since the plans were revealed.
Reasons for Caution
Still, Morgan Stanley’s Global Investment Office believes more policy action is likely needed. While Beijing’s recent efforts are a step in the right direction and could help boost China’s GDP growth for the next year, they may not be enough to address at least two key structural problems facing the economy.
- A beleaguered residential real estate market: Excess supply and collapsing confidence have led to declining home prices. This, in turn, has contributed to a deflationary spiral—in which prices fall and the burden of mortgage debt rises. (Generally, deflation makes debt harder to repay, because even though prices are falling, so is the value of assets, while the amount owed remains the same.) China’s challenge is so severe that some experts believe nothing short of a massive rescue program—akin to measures taken during the 2007-2009 financial crisis—will cure it. Morgan Stanley analysts estimate the cost of such a program might be as much as five times the current announced and speculated stimulus programs.
- A high cost of capital: Equally constraining has been the central bank’s reticence to get aggressive about the “real” cost of capital. While nominal rates have fallen and now are around 3.6%, they are closer to 5% when adjusted for deflation. For perspective, U.S. real rates have stabilized around 1.5% to 1.75% in the last year. This dynamic has kept the renminbi’s value relatively high versus the U.S. dollar, yet a weaker domestic currency would likely be more beneficial by making China’s exports cheaper to foreign buyers. This could help domestic manufacturers, many of them suffering from spare capacity.
Beyond these challenges, China also struggles with poor consumer sentiment, disappointing youth employment prospects and confusing messaging around the government’s support of equity markets, not to mention more immediate threats from geopolitical rifts with the U.S.
How to Invest
For now, Beijing’s efforts are more likely to support a tactical bounce in equity markets, but fall short of the catalysts for a new bull market.
Investors should watch the renminbi for signs of strength, as that will be an indicator that stimulus efforts are actually working on the real economy.
Consider adding to global, non-U.S. and non-China emerging-market equities as part of a diversified portfolio. U.S. cyclicals may also get a short-term boost.
Información extraída de: https://www.morganstanley.com/ideas/china-economy-deflation-stocks-2024
