China: Stimulus and private sector plan lift Chinese markets

This update is part 2 of China holiday wrap-up with summary of news over the summer period. Part 1 was published last week, see China holiday wrap-up – Growth revised lower again, US-China tensions ease, 18 July.

Economics: More policy support

Politburo sends stronger stimulus signals: On Monday 24 July, Chinese leaders in the 24-member Politburo met to discuss economic work in H2 this year and their statement came with a stronger wording on stimulus than expected. The meeting, led by President Xi Jinping called for strengthening countercyclical measures with precision and force and making more policy options available. The meeting demanded efforts to actively expand domestic demand. Below some more quotes from Xinhua on the specific policy areas:

− Consumption: “[efforts should] give play to the fundamental role of consumption in driving economic growth. Consumption of major items including automobiles, electronic products and household items should be boosted, and spending on services such as sports, leisure and cultural and tourist services should be encouraged”.

− Housing: “Real-estate policies should be adjusted and optimized in a timely manner. The policy toolkit should be well utilized with city-specific measures to better meet residents' essential housing demand and their needs for better housing, and advance the stable and sound development of the real estate market

− Private investments: “More policies should be formulated and rolled out to spur private investment”.

− Public investments: “Government investment should better play the role of driving overall investment, with faster issuance and use of local government specialpurpose bonds”.

− Foreign trade/investments: “Multiple measures should be taken to keep the country's foreign trade and investment stable…The number of international flights should be increased”.

China releases 31-point document in support for private sector: On Thursday 20 July, China announced a plan with 31 points on how to support the private sector. It’s the biggest step so far to walk the talk on private sector support and it follows up on the charm offensive to the private sector of Chinese leaders since the Communist Party Congress in October last year. A top official from the National Development and Reform Commission said that “In recent times, the development environment of the private economy has undergone certain changes, and many private enterprises are facing problems and difficulties. There is an urgent need to address these new circumstances, improve the institutional mechanisms that promote the growth of the private economy, boost confidence in the outlook for the private economy, and further stimulate the vitality of private economic development.”

Private sector plan gets support from some of China’s tech billionaires: Co-founder of China’s huge tech company Tencent and one of China’s richest men, Pony Ma, wrote a long op-ed for the state-owned CCTV in a rare public deliberation as he generally keeps a low public profile. Co-founder of the mobile phone company Xiaomi Lei Jun, in a separate editorial gave praise to the plan and called it a manifesto for quality growth and innovation. Whether they have been encouraged to write the editorials by China’s leaders is not clear. But state media bringing opinion pieces by some of China’s tech billionaires serves to underpin the government’s message of being committed to the private sector.

Show us your best start-up investments: In another sign of China’s campaign to illustrate support to private companies and big tech, it has asked the tech giants to showcase some of its most successful investments in start-ups. A lot of people were sceptical after China’s Congress in October last year, about the new people appointed for the top leadership. But as we wrote back then, many of them are known to be pro-business and having Xi’s confidence, not least the new Premier Li Qiang. Maybe that is what we are seeing the results of now.

Markets: Rising sentiment

Stocks rally on new plans: While equity investors have mostly been sceptical of Chinese policy signals, following the failed economic recovery this year, the message from the Politburo has so far managed to give a lift of nearly 10% in offshore stocks with continued daily increases since Tuesday. It partly reflects that a lot of pessimism is priced in Chinese equities and despite the increase this week, levels are still very low on a historical basis (see top chart). I still see more upside in the medium term but we should expected continued high volatility and bumps on the road as sentiment is still fragile and China’s challenges are big at the moment, both from a cyclical as well as structural point of view.

CNH recovers some ground: The rise in sentiment has also lifted CNH after a period of constant losses. USD/CNH is down to 7.16 after hitting close to 7.30 in early July and EUR/CNH has dropped to 7.88 down from the latest peak at 8.10. I still look for USD/CNH to move gradually higher on the back of more monetary policy easing in China while the Fed keeps a tightening bias for now. However, EUR/CNH is projected to move lower to around 7.60-7.70 in 12M supported by our forecast of a further decline in EUR/USD.

Commodities gain: Metal prices and oil prices have also recovered lately with copper up 6% this month while oil prices have been supported by both OPEC output cuts and Chinese stimulus signals driving and increase from below USD75 per barrel (brent) in late June to currently USD84 per barrel.

Download The Full China holiday wrap-up – Part 2