INTRODUCTION

On September 24, 2024, China announced a major stimulus package, its largest since the pandemic, pledging to ramp up fiscal support. The package aimed to address the country’s slowing economic growth and declining consumer confidence. Key measures included
• Cuts to key lending rates and the reserve requirement ratio.
• Support for the equity markets, featuring a liquidity facility to assist companies and shareholders with stock buybacks.
• Direct aid for unemployed graduates and the introduction of a monthly allowance for children.
• Bond issuance to stimulate consumption, including subsidies for replacing consumer goods and upgrading business equipment.
• Housing market support, with the government purchasing housing supply through loans provided to developers, commercial banks and re-lending institutions.

Bloomberg described the stimulus package as a “sea change” in how China will manage its economy, with a greater focus on supporting consumer demand, rather than monetary stimulus which has historically only offered temporary support.

So, is this time different? Is the stimulus package China’s “whatever it takes” moment that changes the long-term view of investors?

ANALYSIS

The stimulus comes as China risks missing its official economic growth targets for the year. Companies are scaling back investments and consolidating operations in response to slower growth and shrinking profits, according to recent reports from the EU and American Chambers of Commerce.

China’s markets have been under pressure since regulatory changes in 2021, which included greater supervision of ride hailing companies and firms listed outside the country along with new rules for afterschool tutoring firms. These actions came after China had passed a data-security law that gave the state more power to compel private-sector firms to share data with authorities and controls/limits data that can be sent overseas and several technology giants (including Alibaba, Tencent and Meituan) were cited for violations, including inconsistent pricing, working conditions and data security, and ordered to conduct internal reviews and rectify issues to avoid legal action.

Since 2021, China-focused ETFs have seen outflows and EM funds have shifted away from the country. Gross and net allocations to Chinese equities had dropped to five-year lows.

Source: Strategas

The markets seem to agree with Bloomberg. Turnover, flows and returns all turned sharply higher, creating one of the largest one-week rallies for a large country market on record. The iShares MSCI China ETF (MCHI) rose +19.5% for the week. Goldman Sachs reported trading volume for the iShares China Large-Cap ETF (FXI), largely by US macro hedge funds, and net buying across their prime brokerage book reached record highs.

So, is this time different? Does the stimulus package reflect a change in how China will manage its economy? Is this China’s “whatever it takes” moment that changes the long-term view of investors?

China has successfully followed the early stages of the Asian Tiger growth model, driving growth through state-directed investments. However, to sustain growth, the next phase requires a shift toward domestic consumption, which means moving investment decisions from the state to the individual. It is not clear that this transition will happen anytime soon. Chinese government policy remains primarily focused on maintaining the Communist Party’s power, with its legitimacy tied to delivering economic growth, primarily through exports, as evidenced by its unprecedented investment in photovoltaics, electric vehicles and rare earth minerals.

Although the government presents its policies as addressing inequality, promoting common prosperity, and ensuring data security and financial stability, there has been a clear shift under Xi Jinping’s leadership away from promoting prosperity through capital markets and toward state control, in his attempt to end China’s “Century of Humiliation” by having it emerge as the global superpower.

While the stimulus package demonstrates more determination and includes the most aggressive measures since the pandemic — offering a direct boost to markets — it does not address deeper structural issues like aging demographics, loss of cost competitiveness, heavy reliance on declining property markets and export-driven growth. We believe local governments also pose a problem, as moving away from investment-led growth requires shifting income away from bankrupt local governments to the consumer. In our view, the package largely follows the old growth model and as long as policy remains focused on maintaining party control, long-term growth prospects and the regulatory environment will remain uncertain.

The risk is that similar to previous stimulus packages, the immediate market rally reflects only a reflexive response to stimulus. Interestingly, while the equity markets moved higher, bond yields were essentially unchanged.

In early November, the government announced a $1.4T plan to allow local governments to refinance “hidden debt” and lower borrowing costs as fiscal revenues have fallen short of targets. Markets appeared disappointed, seemingly expecting a larger monetary package and more fiscal stimulus MCHI rose +39.9% at its peak following the announcement but has since retraced -15.9% as economic numbers have yet to reflect the stimulus and/or have not met expectations.

The US presidential election also raises additional uncertainty. While the Biden administration largely maintained the tariffs increases of the first Trump administration, President-elect Trump has threatened to increase tariffs 60% or more on Chinese goods with China hawkishness a rare bipartisan view.

Source: Bloomberg, TwinFocus

CONCLUSION

While it remains unclear if the stimulus package portends the policy changes needed to address long-term structural growth issues, the rhetoric around supporting the economy has clearly changed and increases the likelihood of further aggressive actions with the possibility that internal party processes have delayed the fiscal “bazooka” until next year.

In our view, the stimulus package may make China a potential short-term trade but not a long-term investment.

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Opportunity zone investments are subject to unique risks, including potential regulatory change. For example, a proposed bill could significantly change the qualification requirements under the opportunity zone program, with many of these provisions having retroactive effect. As one example, these changes would terminate the designation of certain tracts as qualified opportunity zones, significantly change some of the requirements for qualification as a qualified opportunity zone business and make some other changes to the opportunity zone provisions, with many of these changes having retroactive effect to the date of the original enactment of the opportunity zone provisions.

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