Thursday, Sept 26, 2024

China – is this time for real? And geopolitical hotspots get hotter.

“Well, all information looks like noise until you break the code.” – Neal Stephenson, Snow Crash ||

Hello everyone, I hope you’re all well!

Today I focus on China, because statements from the Politburo earlier this morning shine a new light on Tuesday’s and Wednesday’s stimulus measures. Now, I am starting to believe that the authorities are getting serious.

Plus, the rumblings from our familiar geopolitical hotspots continue to get more ominous.

IN THIS NEWSLETTER:

• Finally, China seems serious about stimulus

• It’s all about rhythm

• The market impact?

• Geopolitical hotspots get hotter

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WHAT I’M WATCHING:

Finally, China seems serious about stimulus

China is ramping up its stimulus measures, and I’m starting to come around to the idea that they may be able to pull it off.

I’ve been sceptical so far because there have been no signs that Xi Jinping was willing to unleash strong enough measures to revive the economy, given the tone of the latest Party Conference. The ideology-focused “return to the basics” message suggested that slower growth would be an acceptable price for greater conformity. And the monetary policy adjustments so far felt like bandaids on a rhinocerous.

But there do now seem to be signs of panic, not so much from the recent measures themselves, but from the quantity of them. In other words, the size here is less relevant than the number. Officials seem to have realized that monetary tweaks are not stimulating demand, because the availability of loans is not the main problem. The underlying issue, as I wrote on Tuesday, is weak consumer confidence, which wasn’t helped by the tentative nature of stimulus measures over the past year and a half.

The current volley just might turn confidence around, as it signals a greater determination on the part of officials.

Earlier this week, the PBoC announced the largest stimulus package since the pandemic. It included:

• A reduction in the RRR (the reserve ratio for banks), freeing up market liquidity

• The lowering of the seven-day reverse repo rate from 1.7% to 1.5%

• A 50bp cut in rates on existing mortgages, boosting disposable income

• Support for loans to companies willing to purchase land held by real estate companies

• More public funds for local governments to buy unsold homes and convert them into subsidized housing

• A “study” of a state-backed equity market stabilization fund

All that, though, didn’t seem particularly exciting. The RRR reduction and interest rate moves would only have an impact if borrowing stepped up, the mortgage rate cut would impact only around 10% of households, and helping real estate companies out of their balance sheet crises is more about avoiding painful collapses than an incentive to spend. As for the equity market support, well, a “study” is just that, and anyway, less than 10% of the adult population holds stocks (vs roughly 70% in the US).

Yet there were two items in Tuesday’s news drop that I confess I didn’t pay enough attention to: