China’s New Stimulus Package: The Start of Something Big?

The latest measures drove a big bounce in Chinese stocks, with the Hang Seng Index finishing up 4.1% on 26 September. The China Shenzhen Stock Exchange A-Share Index climbed 4.3% that day and more than 15% for the week, its best performance since 2008 when China announced a sizable stimulus package during the global financial crisis.

After the PBOC announced on 29 September that homeowners will be permitted to refinance their first mortgages, the rally continued and boosted the return on the MSCI China Index to 24% for September alone and almost 30% for the year so far.

China’s bond market had the opposite reaction initially: Prices fell on the expectation that fiscal stimulus would translate into more government debt issuance. However, strong domestic demand for China’s bonds this year had previously helped push yields to record lows, with the 10-year yield around 2% in late September, as the central bank cut rates, real estate prices continued to decline, and equity markets lagged.

Which way bonds go from here may depend on the details of the fiscal stimulus; even though bond supply is expected to rise, we believe demand is likely to stay strong amid weak credit growth.

We believe the impact of this package by itself on key areas of weakness in China—consumption and housing—is likely to be limited.

China’s policy approach overall has been tilted toward supporting investment (i.e., creating more supply) at a time of demand deficiency. The current household savings rate is still high at 36%,¹ and consumers’ reluctance to spend has contributed to a deflationary environment.

More support for consumption will likely be needed to put the economy onto a sustainable path out of deflation. Shanghai’s announcement in late September of RMB500 million (more than $70 million) for consumer vouchers may be a step in the right direction, but sustaining consumer spending could require more significant changes from the Chinese government. Raising social security and healthcare support, for example, would ease the financial burdens that encourage saving. Incentives to purchase unsold housing inventory would further help the property sector.

The PBOC’s support facilities for the equity markets bode well, and the package has clearly boosted sentiment in China’s stock markets already. We also expect the stimulus to help the real estate and banking sectors.

We are encouraged by the new willingness of the government to engage in fiscal stimulus. It comes at a critical time. With exports less reliable as a source of growth due to trade tensions and expectations for slowing growth elsewhere, including the United States, boosting domestic consumption could help China get to its 5% growth target in 2025.

The announcements have provided few details on the fiscal stimulus, and more information is expected in the next few weeks. The timing of the package leaves room for the government to unveil more measures—fiscal and otherwise—before the end of the year. We will closely watch where the fiscal funds are directed and what the likely impact of any additional measures will be on the key areas of consumer spending and housing.