Asian equities staged a robust rally in September after China’s central bank unveiled its most aggressive stimulus package since Covid to bolster the sluggish economy. China and Hong Kong shares surged for several days as authorities hinted that more support measures are on the way.
On September 24, the People’s Bank of China (PBoC) announced it would cut banks’ reserve requirement ratio by half a percentage point and the main policy interest rate by 20 basis points. As part of efforts to revive the property market, it will cut interest rates on existing mortgages by 50bp on average, and the minimum downpayment requirement for all types of homes to 15%. The PBoC is also creating a pair of new structural monetary policy tools to support the stock market. Eligible institutional investors will be able to borrow liquid assets such as treasury bonds and central bank bills directly from the central bank, using assets like exchange-traded funds (ETFs) as collateral, and then sell them for cash to invest in equity markets.
Heartened by the support measures, the S&P China 500 and S&P Hong Kong BMI closed September up 22% and 16%, respectively. The China equities’ strong performance, coupled with a broad strengthening of Asian currencies against the US dollar, helped the S&P Pan Asia BMI (USD) rise by 5%, marking its best monthly return in 10 months and ending the quarter up 9%, according to S&P Global.
China’s economy expanded at a slower pace in the second quarter of 2024, with a growth rate of 4.7%, down from 5.3% in the previous three months. Nevertheless, the first-half growth of 5.0% met the official annual target. Hang Seng Bank forecasts a GDP growth of 4.9% for the full year.
While the struggling economy has dampened consumption, net exports have partially recovered, transitioning from a negative contribution in 2023 to a positive one this year. Net exports now account for over 10% of the growth achieved in the first half of 2024, with shipments of vehicles, ships, and high-tech products showing strong growth. This shift highlights the evolving dynamics in China’s economy as it grapples with internal and external pressures, Hang Seng Bank says in a report.
“The unveiling of the sudden stimulus package underscores the Chinese authorities’ renewed urgency in addressing the economic slowdown,” says Nicholas Yeo, head of China equities at abrdn. This time, the policy messaging marks a change in intentions, with key economic indicators flashing warning signs: a 5% GDP growth target, an 18.8% youth unemployment rate, growing fiscal stress in local government balance sheets, and prolonged deflationary pressure.
“Given the high stakes, we anticipate meaningful fiscal follow-up measures as authorities strive to stimulate a more robust economic recovery. The risk of undermining policy credibility if these measures fail to revitalize the economy adds further urgency,” he notes.
More supportive measures are already beginning to emerge, as the protracted property downturn and subdued growth momentum continue to add pressure to the economy. While the effects of the recent rounds of marginal monetary easing have started to fade, the Politburo meeting in September signalled that more forceful and substantial fiscal measures are on the horizon.
This shift in fiscal policy thinking could gain momentum in the coming months. “A budget revision, potentially in late October (following 2023’s example), might be considered, especially if third-quarter GDP growth disappoints. There is still headroom for local government bond issuance and flexibility regarding the fiscal deficit”, Yeo adds.