Chinese stocks gain on a big economic stimulus package

Why have Chinese stocks bounced back?

Last week, the People’s Bank of China (PBOC) announced a significant economic stimulus package aiming to revitalise its slowing economy. The measures are the largest stimulus package implemented since the pandemic and include a raft of monetary easing and capital market support designed to stimulate growth, following recent sluggish economic data and a property market crisis. Chinese stocks have also benefitted from the tailwind of US interest rate reductions, which has caused the Yuan to strengthen against the dollar

What are the stimulus measures?

Monetary easing

The first measure is monetary easing. The PBOC has reducing the reserve requirement ratio – the percentage of a bank’s deposits that must be held in reserve, rather than being invested or lent out. By cutting this requirement by 50 basis points, the PBOC has freed up approximately $142 billion for new lending, with potential for another cur later this year.  There has also been a reduction in key interest rates, including a 0.2 percentage point cut in the seven-day reverse repo rate to 1.5%, which also helps lower borrowing costs across the economy.

Mortgage and Property Market Support:

Interest rates on existing mortgages will be cut by 0.5%, with the minimum down payment for second homes reduced to 15%. This is part of a broader effort to stimulate demand and stabilise the property market, which has been in severe decline.

Capital Market Support:

The PBOC also introduced a $71 billion liquidity swap program for funds and insurers to boost stock market activity. It will also offer low-interest loans to commercial banks for share buybacks and increasing stock holdings, with the intention of boosting liquidity and valuations.”

Will the rally continue?

As with any investment, it’s impossible to predict the future. A continued rally would mark a significant turnaround after years of sluggish performance. Although the Shanghai Index has returned an almost 3% year-to date increase, it remains down by -1% over the past 12 months, and has only seen 5% growth in the past 5 years.

However, it’s important to note that even after their gains, Chinese financial markets remain well below their 2021 peak (see graph below). There are no guarantees that this rally will lead China to surpass its pandemic-era highs, but for China bulls, this can be taken as a positive sign that there is still room to run. However, when considering any investment, investors should carefully consider the risks that they may face and make their own analysis.

Which assets could be primed to benefit?

Chinese Technology Companies: U.S.-listed shares of major Chinese firms like Alibaba, PDD Holdings, and Li Auto have surged following the announcement, with increases of up to 12% in some cases.

Metals and Commodities: China’s stimulus is boosting global demand for raw materials. Copper prices have risen due to China’s role as the largest consumer of industrial metals, with demand expected to remain strong due to its key role in major trends like renewable energy and AI.

Chinese Property Stocks and Real Estate Funds: The property market measures, particularly the mortgage rate cuts, could benefit Chinese real estate firms and funds with exposure to the sector, though these investments remain high-risk given the turbulent recent fortunes of the sector.

ETFs: To explore specific investments benefiting from these moves, investors may want to consider exchange-traded funds (ETFs) tracking Chinese sectors. For examples, the KraneShares CSI China Internet ETF tracks and mirrors the results of publicly traded Chinese companies that focus on internet services. In the past month the index gained 28%, with over 22% increase in the past week due to market expectations that we will finally see a stimulus package aimed at fighting the slowdown in the Chinese economy.

By Bogdan Maioreanu, market analyst at investment platform eToro