Moneycontrol Pro Weekender | Xi rides to the rescue

Dear Reader,

The Chinese authorities lost no time in taking advantage of the leeway provided by the Fed rate cut to signal a policy turnaround of their own this week.

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On Tuesday, the People’s Bank of China announced that it would reduce the banks’ reserve ratio, lower repo and lending rates and reduce mortgage rates and down payments, delivering a stiff dose of monetary stimulus. On Wednesday, China’s State Council announced a 24-point plan to boost employment and social spending to help the disadvantaged and dovetail the country’s high-tech push with educational and job opportunities. And on Thursday, the all-powerful Politburo put its weight behind the stimulus, pledging to stop the fall in property prices, increase fiscal spending, support consumption and the private sector. Importantly for China’s system of governance, it urged party cadres to boldly implement new policies and said officials who make inadvertent errors while promoting development would not be punished. The government also vowed to support enterprises — particularly small and medium-sized private companies — aiming to increase wage growth for lower-income earners. And the cherry on this stimulus cake was support to the capital markets.

It's a sea change from the measured baby steps that the Chinese policy makers were taking so far, worried as they are about taking on additional debt. But the deteriorating Chinese economy seems to have forced their hand. The GDP growth target of “around 5 percent’’ for the year is likely to be missed. The youth unemployment rate rose to 18.8 percent in August. The Chinese authorities seem to have realised that the bigger risk lay in not acting and there is no alternative but to go in for a dose of classical Keynesian stimulus.

The immediate reaction was a strengthening of the yuan, a rise in bond yields, a 12.9 percent rise in the Shanghai Composite index, a 15.7 percent rise in the CSE 300 index and a 13.1 percent jump in the Hang Seng this week. Other markets too went up, emboldened by the liquidity to be unleashed by China, the US and other rate cutting central banks.

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The question is: Will the euphoria last? There’s little doubt that the sudden wave of stimulus caught markets by surprise. With many fund managers in this month’s Bank of America survey of global fund managers saying that “short China equities’’ was one of the most crowded trades, there was a scramble to cover the shorts.

Nevertheless, the survey also showed that fund managers were very pessimistic on China’s growth. Among Asia fund managers, the BofA survey found that “net 35 percent of the participants expect the largest economy in the region to weaken over the next 12 months - the lowest breadth since the start of the survey in 2022. The endless wait for a concerted easing effort seems to be driving investors out of patience, as they look to cut exposure on any bounce and venture into other markets instead… cash hoarding by households is here to stay, and so is the potential for de-rating of China equity markets’’.

Will the stimulus change matters? The BofA survey of Asia fund managers found that 10 percent of them were looking to reduce exposure to Chinese equities on any bounces. On the other hand, 8 percent said they would build exposure on any signs of policy easing and 23 percent said they were waiting for more credible signs of easing before adding exposure.

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Of course, everything depends on execution. Most analysts echo the sentiments in this FT piece, free to read for Moneycontrol Pro subscribers: “If the MoF (Ministry of Finance) interventions are transformative, there might be the beginnings of an investment case here. But if past is prologue, there won’t be.’’ Moreover, the Chinese leadership is focused on fostering what it calls “high quality development’’. It realises that the old policies that led to the country’s rapid development are no longer working and the next leg of growth will come from technology, innovation and the green economy. As long as growth could be secured by throwing resources into investment and infrastructure, the Chinese state-directed model worked very well. It’s far trickier, however, when growth has to depend on increasing private consumption. The trade war has only exacerbated the downturn.

But it's not just the trade war with the US that is the root of the problem. The disappointment with China’s policies has grown with the crackdown on private sector entrepreneurs, the cap on salaries in the state-owned financial sector, the targeting of top executives on charges of wrongdoing and the leftward lurch towards “common prosperity’’. This FT article, says pithily, “It’s no longer glorious to get rich in China—it’s dangerous.”

But why kill the goose that lays the golden eggs? Why hobble the private sector? The answer lies in rising social discontent in China, due to the wealth of the elite and nepotism and corruption, particularly as a slowing economy means fewer opportunities for upward social mobility. A recent article in The Economist had the headline ‘A new class struggle is brewing in China’. Anecdotal reports say that Xi’s campaign against corruption has widespread support among the masses.

As we have pointed out earlier, the root contradiction in China at present is between the control by the Chinese Communist Party on the one hand and capitalism and markets on the other. So far, growth has been able to paper over the cracks. Now that growth is faltering, this glaring contradiction has flared up.
Cheers,
Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Accenture and Indian IT stocks, Weekly tactical pick—niche EMS company, What should investors do with the carbon black twins, Manba Finance IPO, HDB Financial Services, Hyderabad Industries, How strong is India’s steel in the face of Chinese slowdown? Muthoot Finance, Nocil: A casualty of China dumping, KRN Heat Exchanger IPO, Intellect Design Arena, Why should investors prefer NBFCs to banks? V-Guard, Mrs Bectors Food Specialities