As Beijing’s signal campaign sends China stocks skyrocketing, matter analyst Stephen Jen , among the bull who think China’s biggest protest since 2008 is just getting started.
” Foreign equities , are really devalued”, says Jen, the chief executive officer of Eurizon SLJ. Because “investors are so thin everything Taiwanese”, he notes,” a severe rally is entirely feasible”.
Chinese shares rose for a ninth straight day on Monday ( September 30 ) thanks to China’s bold moves last week to slash interest rates, lower mortgage rates, relax regulations for homebuyers in major cities, reduce the amount of cash banks must keep in reserve, and telegraphed moves of stimulus to come.
Today’s wave by as much as 9.1 % in the standard CSI 300 Catalog is the biggest since 2015, a month drenched in relevance for President Xi Jinping’s state. In July and August 2015, Shanghai shares plunged to a third of their worth in just three months.
Fast-forward to the present, the People’s Bank of China’s ( PBOC ) actions, coupled with the US Federal Reserve’s big easing and falling global oil prices, mean China’s risk assets “ought to do very well”, Jen says. ” After the US vote, I expect world stocks to march profoundly into year-end”, he adds.
No so fast, warns Stephen Roach, past Asia-region chair for Morgan Stanley. Is China’s long-term financial problem over now that the Politburo has issued a message of further emergency meetings, asks economist Roach? If it were only that easy”.
Roach remains “increasingly concerned that China was at risk of falling into a , Japanese-like quagmire , – , a , balance strip recession , characterized by slowdown and depreciation as an extension of the bursting of a big debt-fueled property bubble”.
Matter Roach among the academics wondering what, oh what, the share bulls rushing China’s means are thinking.
In fact, investors are rushing up into everything China without project plans to restore the still troubled real estate market, rebalance growth engines toward services and apart from exports, enhance local governments ‘ struggling balance sheets, and create strong safety nets to encourage China’s families to save less and spend more.
President Xi’s staff should be focused on the gap between those reversing China little posts, which Bank of America Corp discovered was one of the most crowded industry in the world, and the unrelenting China bears if it wants to keep the bulls work going.
That means entering the march with bold plans to carry out the liberalizing measures his Communist Party has promised to do since 2013 but has failed to deliver.
For today, China’s rapid return to economic stimulus setting has the nation’s attention. However, Zhiwei Zhang, an economist at Pinpoint Asset Management, is right to say that” the key policy to address the macro challenge remains to be fiscal.
In order to help China meet its 5 % economic growth target, local media are buzzing about an additional 2 trillion yuan ( US$ 285 ) worth of bond sales. Much more may be needed, nevertheless, to improve poor household demand and offset headwinds from overseas.
Japan’s increase in interest rates to their highest level since 2008 poses a risk to other countries. Another shows signs of strain in the US economy as a contentious election draws near, with both Democrats and Republicans threatening new tariffs on everything made in China.
Last week, PBOC Governor , Pan Gongsheng , unveiled a barrage of support measures, including a reduction in the seven-day reverse repurchase rate to 1.5 % from 1.7 %. Additionally, the PBOC announced the largest-ever rate reduction for its one-year policy loans, cutting loan prime rates and deposit rates.
The Politburo, Beijing’s top decision-making body, called for a “forceful” implementation of these and other measures supposedly to come. Additionally, it highlighted a new need to” stop declining” the real estate market.
These efforts might include removing some of the restrictions on home purchases that are still in place. Top cities could impose restrictions on visitors who are not from their own neighborhoods. In other words, liberalizing China’s “hukou” residence permit system.
Beijing has n’t yet provided a detailed timeline or procedure for getting bad assets off the balance sheets of large property developers to lessen their default risks. Or to encourage local governments to purchase unfinished real estate projects without further deteriorating their already fragile fiscal standing.
Premier Xi Qiang’s team has also made significant efforts to make more market space available for small and medium-sized private companies by reducing the dominance of state-owned enterprises. And global investors still are n’t clear on the state of Xi’s crackdown on China’s biggest tech companies.
Roach is one of the people who is concerned that last week’s Politburo statement only “paid lip service to fiscal stimulus imperatives,” even on fiscal issues. These actions were more likely to be viewed as broad promises than as a comprehensive list of planned actions.
Roach points out that while the Politburo vowed to stop the housing market’s decline, policy choices were made in support of this goal, primarily through lower mortgage rates, downpayment requirements for second homes, and lower interest rates on so-called social housing.
Roach remarks that the long-awaited fiscal program, which would absorb the surplus of unsold homes and turn it into low-income public housing, had a notable lack of detail.
China continues to be wary of implementing the kind of fiscal bazooka that was so successful in sparkeding its recovery in 2009-10, like Japan, where fiscal actions in the 1990s were repeatedly strained by rising public sector indebtedness. And perhaps that’s with good reason”, he says.
Roach points out that the Chinese government’s debt-to-gross domestic product ratio was 85 % in early 2024, nearly three times what it was in 2009. Following Lehman Brothers ‘ demise in the US, Beijing finally started using the stimulus apparatus.
It’s imperative, though, that Team Xi do more to deal with investors ‘ underlying concerns about China’s financial system than just throw money at the problem, economists say.
Last week, the PBOC cheered stock punters by unveiling a new 500 billion yuan ($ 71 billion ) swap facility that funds, securities firms and insurance companies can tap to buy equities. The facility could be increased to 1.5 trillion yuan ($ 214 billion ).
Beijing is also introducing a lending facility for publicly traded companies to buy back shares and increase holdings. It will start at 300 billion yuan ($ 42 billion ) and possibly grow to 900 billion yuan ($ 128 billion ). Additionally, a type of market stabilization fund might be in the works.
Last week, Wu Qing, the chairman of China Securities Regulatory Commission, said Beijing will roll out moves to encourage mergers and acquisitions.
With all that, there’s little doubt the stimulus floodgates have been opened. We believe that the persistent growth weakness has hit policymakers ‘ pain threshold, and the policy put has been triggered, as Goldman Sachs analysts wrote in a note.
Yet Team Xi needs to combine supply-side actions to further strengthen China’s investment environment for the long run to ensure the bull run continues.
As Roach explains, comparisons with Japan are far from perfect. There are many characteristics of China that are fundamentally different from those that contributed to Japan’s numerous “lost decades,” he claims.
” Other than being a large developing economy with several still untapped sources of future growth– namely,  , household consumption, urbanization, and , insufficient capital endowment , of its large workforce – China also benefits from understanding the lessons of Japan”.
For now, Roach admits,” China’s seemingly outsized policy stimulus took most of us by surprise”. He adds that” the financial authorities apparently came to the rescue with their own version of a “big bazooka” just as we had grownaccustomed to Beijing’s grudging response to increasingly serious economic problems. ‘ , At least that’s the verdict of the Chinese equity market”.
Follow William Pesek on X at @WilliamPesek