Recent Stimulus Measures in China

A slew of recent stimulus measures announced by China will most likely provide a boost to domestic equities and have much less of an impact on global assets, according to analysts at UBS.

Last week, Beijing unveiled a package of new policies aimed at providing support to China’s sputtering economy and teetering housing sector, including:
– A cut to interest rates
– A reduction in existing mortgage costs

The People’s Bank of China (PBOC) also announced a swap program with an initial size of 500 billion yuan designed to give funds, insurers and brokers easier access to funding needed to purchase stocks. Moreover, the PBOC stated it would provide up to 300 billion yuan in cheap loans to commercial banks to help them fund share purchases and buybacks by listed companies.

Following the announcement, stocks in China posted their best weekly performance in almost 16 years, with the upturn continuing into Monday.

In a note to clients, UBS analysts said local equities in China should continue to be the most direct beneficiary of the stimulus unveiled thus far.

However, analysts have argued that China may need to roll out more measures to prop up the economy as data showed that factory and consumer activity remained sluggish in September.

The UBS analysts stated that hopes for more stimulus—particularly fiscal support for consumers—and the relatively short duration of the jump in Chinese stocks means they aren’t fading the rally yet, where “fading” refers to a trade against a prevailing market trend.

They added that global assets will likely be less buoyant following China’s stimulus moves, although some equity markets could still see a boost. For instance, other Asian equity markets like Korea may also benefit from easing headwinds for Chinese consumers amid undemanding valuations. Furthermore, other inexpensive equity markets with strong or improving growth outlooks—such as South Africa, the Philippines, Malaysia, and Poland—may not be directly exposed but can benefit from any potential recovery in flows towards emerging markets.