By: Liqian Ren
Key Takeaways
- China’s latest rate cuts and liquidity facilities, announced on September 24, exceeded expectations. Some fiscal stimulus is also expected to follow. Challenges remain in spurring credit demand and reversing weak consumer spending.
- The stock market reacted very positively to new liquidity channels for stock purchases and share buybacks. It’s now in a retail investor driven rally which is mostly driven by sentiment, and difficult to predict the trajectory.
- Despite attractive valuations, long-term investors remain cautious on China.
On September 24, just before the A-shares market opened, China’s top three capital market regulators—the People’s Bank of China (PBOC), the China Securities Regulatory Commission (CSRC) and the National Financial Regulatory Administration (NFRA)—unveiled a series of monetary policy and capital market initiatives.
Key measures announced include:
• A 50-basis points (bps) cut in the reserve requirement ratio, with more cuts anticipated
• A 20-bps reduction in interest rates
• A 0.5% decrease in existing mortgage rates
• Lowering the minimum down payment for second homes from 25% to 15%
• Introducing swap facilities for financial institutions to access liquidity for stock purchases
• Providing low-interest loans to companies for share buybacks
Future Expectations
1. Rate Cut and Capital Market Facilities Surprises
The rate cuts exceeded expectations. There’s expectation and room for further reserve ratio cuts down the road. In 2000, China’s reserve ratio was 6%, while it is now averaging about 6.5%. Despite lower loan costs, credit creation remains weak, primarily due to a lack of demand. The ongoing absence of fiscal and income support is continuing to suppress consumer spending.
2. Market Response
The stock market reacted positively when the rate cut policies were announced. This positive reaction happened as soon as the PBOC announced specific liquidity measures aimed at supporting the stock market.
The PBOC is establishing two liquidity channels: one for brokerages, insurance companies and banks to exchange bonds for cash to bolster stock holdings, and another for providing low-interest loans to firms for share buybacks.
While the market has welcomed this news, the effectiveness of these new liquidity facilities remains untested, and their success will be measured by how much the prevailing negative sentiment on China is reversed. PBOC generally is considered to be credible, but we expect the market to gradually learn and also test out PBOC’s success in following through.
3. Investment Outlook
Despite current challenges, China remains an investable market. The valuation is about half of the S&P 500 in price-to-forward earnings.
However, long-term investors are likely to adopt a cautious “wait and see” approach toward broader investments in China, as sentiment is still sour. Domestically, the official youth unemployment rate is 18.8%, which is an historical high. For Chinese youth and families who were used to plenty of job openings, this is a paradigm shift.
Conclusion
China’s baseline remains that when sentiment turns negative and economic data underperforms, the government will implement some stimulus measures to meet its economic targets. However, the recovery process is unlikely to be smooth, and improvements in household and company balance sheet will take time.
Originally posted on October 1, 2024 on WisdomTree blog
PHOTO CREDIT: https://www.shutterstock.com/g/Bakhtiar+Zein
VIA SHUTTERSTOCK
DISCLOSURES:
U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.
Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each entity involved in compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties. With respect to this information, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including loss profits) or any other damages (www.msci.com)
Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Brian Manby, and Scott Welch are registered representatives of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.
You cannot invest directly in an index.
