While we have been focused on battling inflation and rapid home price appreciation, China, the world’s second-largest economy has been experiencing a bit of the opposite. Deflationary pressures have been weighing on the Chinese economy the last couple of years. All of which has recently been accelerated by a steep decline in home values. Home prices have fallen about 10 percent a year for the past three years, and some analysts are anticipating a steeper decline in values in the coming year. This is not a total surprise, there has been a spattering of stories about bankrupt Chinese property developers accompanied by images of “ghost cities” in the news over the last few years.
The downturn in China’s once booming real estate sector has significantly weakened consumer demand over the last year. Concerned that the currency is too weak, bond yields are too low, and banks' balance sheets are too fragile, the People's Bank of China (PBOC) has hesitated to make major changes to its economic policies. That all changed in the last week of September when the PBOC took aggressive steps announcing a series of monetary economic policy decisions that set off a market frenzy.
On September 24th, the PBOC lowered short-term interest rates from 1.7% to 1.5% and reduced the percentage of assets state-controlled commercial banks must hold in reserves in order to free up capital for consumer lending. Specific to housing, the PBOC lowered existing home mortgage rates, reduced the downpayment requirement, and eliminated other home-buying restrictions. The consumer stimulus package should in theory provide some relief to the Chinese consumer, but it is the PBOC’s action in the stock market that sent both local and foreign investors on a buying spree.
The PBOC announced new tools aimed directly at the stock market. The central bank will refinance bank loans held by public firms so that those firms can then use those savings to buy-back their shares and it will allow major shareholders to buy larger stakes in companies. Both decisions had an immediate impact.
The market reaction to these stimulus measures was euphoric. The Chinese stock market had its best single-week performance since 2008, up 15% in a four-day period. The buying continued and heading into China’s week-long Golden Week holiday, the major Chinese indexes were up 25%. The Hong Kong market has experienced similar rapid gains, reaching a nearly 2-year high on the back of Beijing’s policy shifts.
Such dramatic stock market moves have some calling this the start of a Chinese bull market. Recent prime brokerage data has shown hedge funds plowing into Chinese stocks. Some of the early buying was almost certainly covering short positions, but real money is also changing its stance. BlackRock recently put out a near-term overweight call on Chinese stocks.
The market has clearly welcomed these changes, but after a nearly 30% move in Chinese large caps, how much room is left to run seems to depend on how much more the Chinese government is willing to spend. To spur real economic change, the PBOC will need to change consumer sentiment, so its people spend money. Monetary policy shifts are good for the financial sector, but to boost spending and save the real economy, a robust fiscal stimulus package is likely needed. The soaring stock market is not paying rents on empty apartment complexes.
Rialto Wealth Management is a fee-only, fiduciary, advisory firm based in Syracuse, NY. From financial planning to investment management, we help families across New York and beyond. We can be reached by phone at (315) 992-9129 or via email through our website’s secure and confidential contact page.
China: Bull Market or False Start
November 14, 2024 by Rachel Ryan
While we have been focused on battling inflation and rapid home price appreciation, China, the world’s second-largest economy has been experiencing a bit of the opposite. Deflationary pressures have been weighing on the Chinese economy the last couple of years. All of which has recently been accelerated by a steep decline in home values. Home prices have fallen about 10 percent a year for the past three years, and some analysts are anticipating a steeper decline in values in the coming year. This is not a total surprise, there has been a spattering of stories about bankrupt Chinese property developers accompanied by images of “ghost cities” in the news over the last few years.
The downturn in China’s once booming real estate sector has significantly weakened consumer demand over the last year. Concerned that the currency is too weak, bond yields are too low, and banks' balance sheets are too fragile, the People's Bank of China (PBOC) has hesitated to make major changes to its economic policies. That all changed in the last week of September when the PBOC took aggressive steps announcing a series of monetary economic policy decisions that set off a market frenzy.
On September 24th, the PBOC lowered short-term interest rates from 1.7% to 1.5% and reduced the percentage of assets state-controlled commercial banks must hold in reserves in order to free up capital for consumer lending. Specific to housing, the PBOC lowered existing home mortgage rates, reduced the downpayment requirement, and eliminated other home-buying restrictions. The consumer stimulus package should in theory provide some relief to the Chinese consumer, but it is the PBOC’s action in the stock market that sent both local and foreign investors on a buying spree.
The PBOC announced new tools aimed directly at the stock market. The central bank will refinance bank loans held by public firms so that those firms can then use those savings to buy-back their shares and it will allow major shareholders to buy larger stakes in companies. Both decisions had an immediate impact.
The market reaction to these stimulus measures was euphoric. The Chinese stock market had its best single-week performance since 2008, up 15% in a four-day period. The buying continued and heading into China’s week-long Golden Week holiday, the major Chinese indexes were up 25%. The Hong Kong market has experienced similar rapid gains, reaching a nearly 2-year high on the back of Beijing’s policy shifts.
Such dramatic stock market moves have some calling this the start of a Chinese bull market. Recent prime brokerage data has shown hedge funds plowing into Chinese stocks. Some of the early buying was almost certainly covering short positions, but real money is also changing its stance. BlackRock recently put out a near-term overweight call on Chinese stocks.
The market has clearly welcomed these changes, but after a nearly 30% move in Chinese large caps, how much room is left to run seems to depend on how much more the Chinese government is willing to spend. To spur real economic change, the PBOC will need to change consumer sentiment, so its people spend money. Monetary policy shifts are good for the financial sector, but to boost spending and save the real economy, a robust fiscal stimulus package is likely needed. The soaring stock market is not paying rents on empty apartment complexes.
Rialto Wealth Management is a fee-only, fiduciary, advisory firm based in Syracuse, NY. From financial planning to investment management, we help families across New York and beyond. We can be reached by phone at (315) 992-9129 or via email through our website’s secure and confidential contact page.