China: Is now the time to be bold?

In March the case was made for being bold on China. The rationale for that is based on the part of the economic cycle that China is in. While central banks around the world are hiking interest rates, and there are even rumours of the BoJ looking at joining them soon, the People’s Bank of China is cutting interest rates. In short China is trying to boost its economy while most other central banks are trying to cool their economy to control inflation and get a ‘soft landing’. 

This is the case for more gains in China’s main indices. On Friday last week China’s 50 index made a break of a key trendline higher, so this could be a key technical turning point that matches the fundamental story

China 50 trendline break

China’s bold stimulus boost is more than $5 trillion

According to Bloomberg the monetary policy measures and fiscal measures equals around one third of China’s $17 trillion economy. Here is a bar chart showing the level of support going into the economy this year and the levels from 2020 and 2021. 

Huge bold spending plans

A couple of things to note from the bar chart above. The PBoC is playing less of a role than in 2020. The PBoC kept the Loan Prime Rate 1Y at 3.70%. Expectations were for the 1 Year Loan Prime Rate to be reduced by 5bp. but they did reduce the Loan Prime Rate 5Y by 15bps. That offset some of the disappointment. However, it underscores the fact that the PBoC is not taking a front and centre role in supporting China’s economy. That is going from the general budget spend. 

Main risks to being bold on China

A key risk to this outlook is China’s Covid-free policy. If China maintains this policy then the economy may weaken further. This could result in another dip lower in Chinese stocks unless China decides to boost the economy again. Another risk is if US recession fears grow. As the world’s largest economy a recession in the US will be felt all over the world and will drag on China’s near term growth prospects. An upside risk is if the Fed manage a so-called ‘soft landing’. That could send China’s stocks quickly higher as EM markets turn attractive again. We discuss China’s 50 and many other instruments in my daily webinars here.