Is the China stimulus package enough?

0:06Pushkin. Well, nobody saw that one coming. Suddenly, stocks in China, possibly this year's most heated asset class on earth, have rocketed higher. What's going on? Is it a massive economic recovery? The end to trade wars? No, none of that. It's good old-fashioned stimulus from the Chinese authorities, including the central bank. Now, the scale of the jump in stocks here is really something. We're talking like 23 % or so in the past week. and suddenly the Hang Seng Index in Hong Kong is doing better than the US S &P Index this year. So today on the show we're asking, what have the authorities done and why is the market move so enormous?

0:53This is Unhedged, the markets and finance podcast from the Financial Times' Hank Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London, And I'm joined down the line by the bright young thing of the Unhedged Newsletter and low-key China wonk, Aidan Reiter. Aidan, how are you doing ?早上好, I'm good. I was really hoping you were going to say something in Chinese. Introduce yourself properly in Chinese and impress me.你好 ,我是瑞爱德 .我是一个财, how do you say, financial journalist ?财经记者. That's going to really upset the people who transcribe the podcast. So that's good. Let's make life difficult for people.

1:32So, Aidan, I say like no one saw this stimulus coming. Are you going to say I'm wrong? Are you going to say that you did see it coming because you're so clever about China? No, I'm not going to say I did see it coming. But Rob and I did write a column a few months back saying, you know, China could do more to boost its economy. And a lot of people said that. So I'm not going to say anybody saw this coming. But a lot of people have been pointing towards China saying, you know, now why exactly aren't you going to do more stimulus? Yeah, yeah. When is the bazooka? When are you going to do something to turn this around?

2:00So we'll come on to why they've done what they've done in a second. But first of all, what have they done? Because there's just a whole flurry of announcements and quite an unusually large amount of fanfare that came with it, right? Yeah. So last Tuesday, the People's Bank of China came out and announced a bunch of monetary policy stimulus measures. So they did four things. They lowered the reserve ratio. So they said, banks, you don't need to have as much money on your balance sheets. Start boosting up that lending. They did a small rate cut to the policy rate. They made some revisions on household mortgages.

2:33So it made it cheaper to hold a second home and buy real estate assets. And then they made this pool of capital. It's about$114 billion US dollars worth of capital. And they said two things can be done with it. One, asset managers, investors, you know, insurance companies, this is money for you to borrow to improve your balance sheets to go and buy some equities. And then they gave money to companies and said, hey, companies, time for you to go do some stock buybacks. And, you know, the very explicit point of that is to get people to go into the Chinese stock market, which has not been very lively for a long time.

3:05Yeah. And it's interesting that, isn't it? Because it is a mix of like it's a specific effort to push up the market. This isn't just one of these like rounds of stimulus where you have a load of economic stimulus. And, you know, if the market goes up, so be it. Like they specifically want the market to go higher. Yeah, it's interesting because they have announced since then that they're going to do these broader economic stimulus, which will complement this. But they started with the monetary policy stimulus, which I read as a, hey, we need to fix this as an external, you know, we need to fix the stock market.

3:34And then we're going to focus on the economy. But other people can interpret that differently. Yeah. Yeah. So we had actually written right after this happened, like, this is an interesting monetary policy experiment, right? Are you going to be able to boost stocks sustainably if you're doing this type of stock-focused monetary policy support? And we said, you know, the thing that could give this actual legs is if they were going to do fiscal policy support. And lo and behold, the next day, last Thursday, they said, hey, by the way, we're doing some actual fiscal policy stimulus. Yeah, because I remember after the first set of announcements, various investors were saying to me, oh, this is all well and good.

4:05But until they do fiscal, nothing's going to work. And then, boom, have some fiscal policy on top of it. So Chinese authorities are really serious about this. Yeah, I will say they haven't put a lot of numbers to those fiscal stimulus. So they have said, we're going to do fiscal stimulus. And then there's been reporting from Reuters and some other places about what that will be. but they haven't actually announced what those programs will actually entail. So we have the promise of fiscal stimulus to come, and I can go into those reported numbers if we want, but we only really have the actual details from the government on the monetary stimulus.

4:36I mean, the thing is, this is absolutely like the textbook example of just show your intention. Honestly, like the market doesn't super care about details a lot of the time. It's just like, tell us what your intention is here. And that has very much come across. Yeah. But so why have they done this? So, you know, the basic kind of thinking among sort of global asset managers around China is they've got a horrible problem with the property sector. And this has just been like a train wreck for the longest time. And they're really struggling to turn it around. It accounts for, I mean, you'd know better than me, it's about what, a quarter of the economy.

5:09And it's a massive part of household savings over there is like wealth tied up in property. Yeah. And it's just been like a horrible disaster for a long time. And the thinking was, well, if they can fix the property sector, then I'm sure the rest of the economy will bounce back. And they've made some efforts to fix the property sector. And the rest of the economy has just done nothing. Is that for you like the kind of driving force here? I think that's definitely the big driving force in terms of investment, right? So most households, their main assets are their real estate. So if your main asset is continually depreciating because the market's just so terrible, you're not going to throw your money into stocks.

5:44and stocks have, of course, been really low because of that. I mean, they've been low for other reasons too, but that is one of the key drivers for this low growth. We should note that China's domestic economy has not been so great in the past couple of years, right? Domestic consumption, consumer confidence are at all-time lows. People aren't actually going out and buying things. There's a bit of a gap of trust with the government and the stimulus that's occurring. There is still some growth, right? You're seeing this huge tension with the US and with European powers because there's growth, especially in certain manufacturing sectors.

6:14And that's with government support. And the idea is, you know, we're going to boost these quote-unquote high-quality development sectors. And that's going to get us through this hurdle as opposed to boosting domestic consumption, which is why you've had so many people saying, hey, China, you should do some fiscal stimulus internally. And the government has almost balked at it since then, right? They're like, we want high-quality development. We don't want this, you know, handout support our people kind of development. Yeah, it's really interesting, isn't it? I mean, for you as someone who's been, you know, you've lived in China, you've spent a long time looking at China.

6:44What does this all say to you about what the economic model is? Like how significant a moment is this for the Chinese economy? I think it's a significant moment in this past couple years since they have been so resistant to doing these types of stimulus efforts. You know, they have a lot of highly indebted local governments. They actually, in the past couple years, with concerns over debt and the concerns of broader financial stability, they said, hey, local governments, we're going to stop giving you support in the same way we used to. So they've actually kind of like even pumped the brakes on local investment while the real estate market has also been destroying local government balance sheets and the government's balance sheets as well.

7:17So it's a really big deal in the sense that in the past couple of years, most of their focus, again, has been on quote-unquote high-quality development and giving support to certain industrial sectors as opposed to helping Chinese domestic consumers. They've been kind of flicking at helping consumers in the past couple of months, but it hasn't been full-throated, right? So they've lowered rates and they said we're going to do these interesting buyback programs to get people to turn in their old vehicles and get new vehicles. But that hasn't really been successful to date. So this might be a full-throated, hey, we actually need to do something.

7:46But again, we haven't gotten the specifics of that fiscal stimulus package. Yeah. Is it cynical to suggest that, you know, they can see the U.S. election coming down the pipe? They know that Donald Trump, if he were to be reelected, he's got some really harsh tariff projects in mind for China. Are they trying to get ahead of U.S. politics here at all? It's unclear to me. I mean, I've seen pundits suggest that. But really, I do believe this was motivated, or at least it seems it was motivated by internal pressure and the internal need to turn things around. We should also note that, yes, while China is slowing their growth, they're still growing at 4.7%.

8:20The US and the UK would love that. It's just low by China standards. Yeah, exactly. Economically, do you think it'll work? I'm not sure the stimulus will work, right? As you said, intentions is a lot. But at the end of the day, stocks are supposed to be reflective of an economy. You can't just do these supports for stocks and then allow the economy to – and that'll be this huge rebound, right? Unless you actually have like full-throated fiscal stimulus that changes the real estate market specifically and gets people to buy stocks and invest and invest in the economy because they feel like their other assets are safe, it's hard to imagine this will be a long-running trend.

8:54Perhaps also worth noting, there's been this issue, and I've just written about it a couple times, with bond buying in China, where people have just piled into government treasuries because they have nothing else to put their money in. And the government has not liked that. Interestingly, they've really not liked that. But, you know, you can look at this monetary stimulus measures and say, actually, all this is going to do is support bond buying. If you lower the policy rate, that supports long-end treasuries. And then if you also, you know, lower the reserve ratio for these banks and encourage them to lend, if Chinese households aren't borrowing, they're going to put that money into treasuries.

9:26So this is just going to go against what China has been fighting. Whether it works economically or not, we don't know yet. But we do know that markets are super excited about this. I mean, it's been a massive, like more than 20 % jump in Chinese stocks. I'd be interested in your thoughts around, like, why has this market reaction been so massive? And let me tell you my theory. You tell me if I'm wrong. Please. Like, literally about three weeks ago, I wrote a column in the FT saying everybody hates Chinese stocks. Like I was speaking to the extremely French, very generous with his time, Vincent Mortier from Amundi Asset Management over in Paris.

10:08And he was saying that like when he tries to talk about China investment strategies to his clients, they're just like, no, next. He has not been able to get anyone to buy China for a really long time. And he's like, you know, this is like the world's second biggest economy. Yes, the market is terrible at the moment, but it will turn around at some point. you really should have some sort of allocation to China and clients have been saying, nope, not interested. This thing is bad. There's a US election coming. I'm not having it. And, you know, my sense is that like the Chinese market was just so under-owned by global investors that you have any sort of dollop of good news, any signal of intent from the central bank and from the Chinese government that like we want to turn this around and kaboom.

10:52So it's the power of positioning, right, for me. Do you think that tracks? I think that tracks a lot, right? You have people coming into this market that was really under-owned. It's going to see a huge surge. And again, if it's based on the idea that there could be some real economic stimulus in the last quarters of this year, then there's something there. But I'll say that some of the issues with the Chinese equities aren't just that the Chinese economy and domestic economy hasn't been doing great. There's a lot of questions about trust, about government disclosure, about opacity that have stopped foreign investors from coming into Chinese equities to begin with.

11:23And those things haven't changed at all. Yeah. When they have like a change of heart on the regulatory front about a particular sector or whatever it is, do not stand in the way of it is my very strong advice to you because you will lose. You will always lose. You know, we've seen this over and over again with like the education system, with the tech sector, you know, all of these sectors have like been turned over by kind of regulatory changes of heart. So, yeah, that's definitely a risk, you know, it's China. It seems like those things are getting worse also. So there was some great reporting in FT by our colleagues in China who wrote about how China is, quote unquote, throttling its entrepreneurs and private sector.

12:00So these things aren't changing. If anything, they're getting worse. And yes, there could be some big stimulus that gets you into the market, but you still have to be really wary of what's going on in the domestic political scene and how they're going to impact the actual industries at play here. That being said, if you're investing in the right industries, right, the quote unquote high quality development industries, whether that's EVs or solar or cars, that has government. One of these preferred sectors. Exactly. Those have government tailwinds. So that might be a good investment if you're able to isolate those equities.

12:32Yeah. It's worth bearing in mind that the massive jump that we saw in stocks comes ahead of like a holiday, right, in China. So maybe some of this kind of market run up is a bit front loaded to kind of get your bets in before the market shuts. So do you do you get the sense that, you know, this holiday, you know, notwithstanding, do you think this will last this this pickup in Chinese stocks? Yeah, it's National Week. So, you know, China is celebrating its independence this coming week. It's a really fun week. I have very fond memories of traveling around China during this when I was living in China.

13:02But in terms of whether or not this will extend past that week, I'm not so sure. Right. This could be initial sentiment. People want to get in on the idea that the economy will get the necessary stimulus and the markets will surge because of it. It's unclear what the actual stimulus will be. Investors might get annoyed in a couple of weeks if they still haven't gotten anything real from the government in terms of actual fiscal stimulus. Yeah, yeah. According to Reuters, and again, this is just, you know, up reporting so far, there's going to be 2 trillion yuan, such a renminbi worth of stimulus.

13:31Half of that is going to go to actual like handouts to families and households and, you know, some of these government buyback schemes that have existed already. And then part of that's going to go to, you know, the real estate market and addressing some of the major structural hurdles of local government debt, which, again, could be really beneficial. But again, we haven't actually gotten that word from the government. It's just so interesting. The timing has just completely blindsided everyone. And I kind of love it for that. Katie, you've been reporting on markets for a while. Do you remember when, you know, there have been moments where Chinese equities did decently well, or at least better than they're doing now?

14:03Do you remember what the sentiments were around that, say, pre-2015? I'm struggling to think of a kind of bounce back on this scale for a really long time. I mean, I think it's the biggest run-up in Chinese stocks since 2008. Yeah. So, you know, I've seen some really bad days out there, but I can't think of, like, any really good periods like we've had in the past few days. So, I mean, yeah, don't stand in the way of it. This feels real. Listeners, if you disagree with me and Aidan, you're very welcome to. Do you think this thing is going to last? Do you think it's not going to last? Either way, email me, katie.martin at ft.com.

14:42Additionally, if you'd like to complain in Chinese, then you can email aidan.writer at ft.com. The spelling of his name will be in a blurb somewhere. I welcome all comments in Chinese and other languages. We're going to be back in a sec. Long short.

15:10Alrighty, it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. Aidan, what you got? I am long morning swims. I have been living in, yeah, it's a great feeling to jump in the water in the morning. I've been living in Bowery and this is somewhat related to China but I've been living in Bowery in Manhattan which is near the Chinatown YMCA so I go at 6.30am and it's me, 20 Chinese old ladies and old men and we still laugh together and it's just a wonderful way to start the day That sounds nice Yeah, it's been really lovely That's very wholesome I am long again of people coming up to me at weddings when I've had a large number of adult beverages to say that they love the Unhedged podcast it's like really weird when people in real life come up to you and say oh I listen to you on your podcast and I like it and it's nice so we're going to wrap it up there no one else is getting married that I know between now and Thursday so we will be back in your feed then Unhedged is produced by Jake Harper and edited by Brian Erstad our executive producer is Jacob Goldstein we had additional help from Topher Forges Cheryl Brumley is the FT's Global Head of Audio special thanks to Laura Clark Alistair Mackey Greta Cohn and Natalie Sadler.

16:27FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.