The Impact of China’s Stimulus Packages

As major central banks have begun their rate reduction monetary policies with inflationary pressures waning, their focus has now shifted to economic slowdowns. Over the past couple months, we’ve seen interest rate cuts from the European Central Bank (ECB – 25bps), Bank of England (BOE -25 bps), and most recently, the Federal Reserve (Fed – 50 bps).

China, on the other hand, has been in the throes of an economic slowdown for some time now. The second largest global economy has been dealing with real estate value decline, a slumping equity market (CSI 300 Index), along with a weakening labor market. President Xi spoke last week, calling for the introduction of forceful interest rate cuts, as part of a fiscal and monetary stimulus plan.

Following statements from President Xi and the Politburo, the People’s Bank of China (PBOC) reduced the amount cash banks must hold in reserve (reserve requirement ratio) by 0.5%, to encourage further bank lending and strengthen their ability to support future growth. Additionally, the PBOC lowered a series of interest rates, tied to borrowing costs ceiling by 20 basis points. In an effort to stabilize the real estate sector, PBOC governor Pan Gongsheng released a plan to lower borrowing costs on trillions of dollars of mortgages and cut the minimum down payment ratio for second home buyers, from 25% down to 15%. Other measures included financial assistance for unemployed graduates and cash handouts for low-income earners.

China’s policymakers aim to use this stimulus package to get their economy back on track to achieve its desired annual growth rate of 5%. Since the introduction of the stimulus, there has been a noticeable boost in the equity market: China’s benchmark CSI 300 Index of shares increased over 22% in the month of September, erasing all losses for the year, although it remains significantly below its 2021 highs.

“We’ve seen the asset manager/hedge fund community invest heavily in China, after the stimulus plans were announced. Last week, the CSI 300 Index had it biggest weekly gain in over 15 years. Stocks have been bought aggressively, with a “buy everything China” mentality, as described by David Tepper, founder of Appaloosa Management, in a CNBC interview. This surge in investment has also contributed to a form of currency intervention, boosting the value of China’s Yuan Renminbi.” Sal Provenzano, FX Product Manager.

When combined with the anticipated US interest rate cuts from the Federal Reserve later in 2024, this “buy mode” in China helps explain the appreciation of the Yuan. The graph below illustrates the decline in USD against CNH (Chinese Yuan Offshore) over the past two months (July 31st – Sept 30th) using TraditionData daily FX spot USDCNH mid-rates at 4:00PM EST.