China’s Stimulus Surge: A Boost for Markets or a Risky Bet?
Reality is merely an illusion, albeit a very persistent one. – Albert Einstein
by Pierre Daillie, Managing Editor, AdvisorAnalyst.com
China’s latest stimulus, launched in September 2024, represents an effort to stabilize an economy struggling with internal and external pressures. But the question remains: is this stimulus sustainable, and does it present an opportunity for investors? Examining insights from WisdomTree, BCA Research, and TS Lombard, we piece together a narrative that presents both the opportunities and significant risks tied to this stimulus.
The Optimism: China's "Whatever It Takes" Moment
The stimulus package introduced in September 2024 has been likened to China's “whatever it takes” moment, signaling a serious commitment to addressing its economic and financial market challenges. According to a recent analysis, China’s stimulus efforts stand in stark contrast to earlier failed attempts this year, with a newfound sense of determination from Beijing. “The market responded to the news with understandable enthusiasm,” especially since the measures were seen as addressing equity market performance, according to TS Lombard’s Andrea Cicione and Daniel von Ahlen1.
At the heart of the package are key initiatives: a cut to the reserve requirement ratio by 50 basis points, interest rate reductions, and new facilities for liquidity support that enable stock purchases and share buybacks, according to WisdomTree’s Director or Modern Alpha, Liqian Ren2. These moves are seen as targeting market confidence and investor sentiment, providing short-term liquidity while signaling longer-term policy shifts. As TS Lombard’s Cicione points out, “Corporate fundamentals seemingly improving, cheap valuations, and underweight investors… should be powerful enough to sustain the rally for some time”.
In this context, many analysts believe that there is real potential for an equity rally. Low valuations and rising earnings per share (EPS) have positioned China as an attractive market for investors looking for a bounce after several tough years. The timing, according to some reports, couldn't be better: “Sentiment on the economy and the stock market was extremely bearish… making the market ready for a bounce once the right conditions emerged,” says Cicione.
According to billionaire investor, Appaloosa’s David Tepper, he is buying “everything” he can get his hands on in China (9/26/2024):
The Skepticism: Small Stimulus, Limited Multiplier
However, not all analysts are convinced. The scale of this stimulus, though large by recent standards, pales in comparison to previous efforts. In 2008, China’s stimulus package amounted to 13% of GDP, and in 2015-16, it stood at 9% says TS Lombard. By contrast, the September 2024 stimulus is roughly 1.5% of GDP. Even with rumors of an additional 2.4%, the current package falls far short of past efforts, leaving many skeptical about its long-term impact, according to TS Lombard.
Moreover, the Chinese economy today is not what it was a decade ago. One report highlights that the spillover effects from the stimulus are likely to be limited, given the high levels of leverage in China’s economy and its shift towards consumption-led growth rather than infrastructure-led stimulus. This points to a weakened “multiplier effect,” where the economic benefits of government stimulus are not as potent as they once were. “Owing to an already overleveraged economy and increased emphasis on boosting consumption over infrastructure spending, the spillovers are unlikely to be large this time,” the TS Lombard report notes.
Long-Term Outlook: Structural Problems Persist
The deepest concerns about China’s stimulus relate to unresolved structural issues in the economy. As noted in BCA Research’s Chief Strategist Dhaval Joshi’s (and team) report3, the effectiveness of these liquidity measures will depend heavily on whether fundamental balance sheet problems, especially within China’s banking system, can be addressed. “The effectiveness of the measures could fade unless some fundamental issues are addressed. The key one is fixing damaged balance sheets—especially those of the banks” says Joshi. Without tackling these issues, the stimulus risks being nothing more than a short-term boost to market confidence, with little lasting economic impact.
Moreover, there is doubt over whether China can return to the days of exponential credit growth that fueled past recoveries. As BCA’s Joshi notes, China's “credit impulse has lost its mojo”. Unlike the 2000-2020 era, where credit growth was funneled into a massive housing and construction boom, today there is no comparable channel for that credit to go into. The real estate sector, which once provided a safe haven for household savings, is now saturated with over 130 million empty homes and housing prices that have been declining for three years, says BCA Research. Without a clear destination for credit, even a substantial stimulus could fail to generate the type of growth seen in previous decades.
Conclusion: A Short-Term Opportunity with Long-Term Risks
The Chinese stimulus package of September 2024 presents an intriguing opportunity for investors, but one that is fraught with risk. In the short term, rising earnings and cheap valuations provide fertile ground for a market rally. Sentiment is improving, and the market appears ready for a bounce. For tactical investors, this could be a window of opportunity to ride the rally.
However, the long-term sustainability of this stimulus remains in question. The scale of the measures is much smaller than past efforts, and the multiplier effect is likely to be limited by the over-leveraged state of the Chinese economy. Moreover, without addressing deeper structural issues such as banking sector weaknesses and the collapse of the real estate market, the stimulus may not be enough to fuel sustained growth.
Investors looking to China today must weigh these short-term gains against long-term risks. The rally could be real, but its legs may not carry it far. As BCA’s Joshi and Team bluntly conclude, “Absent the multi-decade housing and construction boom, China will be unable to generate the monster credit impulses that it did through 2000-20”.
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Andrea Cicione and Daniel von Ahlen, TS Lombard. “China Rally: Not too late to get involved.” https://iando.s3.ca-central-1.amazonaws.com/2024-10-02-China+Rally+Not+Too+Late+To+Get+Involved-en.pdf
WisdomTree. "China’s Monetary Stimulus and Liquidity Support for the Capital Market". WisdomTree ETF Blog, 3 Oct. 2024, https://www.wisdomtree.com/investments/blog/2024/10/01/chinas-monetary-stimulus-and-liquidity-support-for-the-capital-market.
Dhaval Joshi, Hadi Elzein & Irene Tunkel. “Why China’s Rally Won’t Have Legs”. https://iando.s3.ca-central-1.amazonaws.com/Why+China%E2%80%99s+Rally+Won%E2%80%99t+Have+Legs.pdf