Is China Rising Again?

Investors have been encouraged by Chinese stimulus measures announced this week - but much more needs to be done to ensure sustained recovery.

Markets rallied this week in response to a long-awaited stimulus package announced by the People’s Bank of China to inject life into a bellwether economy in danger of falling into a state of entrenched deflation.

With stagnant property prices weighing on Chinese consumers, and efforts to dump excess production on international markets threatening a trade war, analysts are warning of the possible ‘Japanification’ of China’s economy - a state of prolonged overcapacity and underconsumption.

Chinese stocks are cheap, trading on an average P/E ratio of around 11 times, but, until this week’s intervention, the CSI 300 index was down by 7% over the past year. Western stocks particularly exposed to the Chinese economy, notably commodities and luxury goods, have been hit hard. Some 45 asset managers now run global emerging markets strategies without exposure to China, and nearly a hundred more are preparing to launch similar products. In the bleak assessment of Vincent Mortier, group chief investment officer at Amundi, ‘The investment case to buy China is totally, totally dead.’

So the new measures, with the promise of more to come, are significant. The Bank announced a rare simultaneous cut of its benchmark interest rate and the reserve requirement ratio, the amount of reserves lenders must hold, and - unusually - offered guidance on further cuts. There is fresh support for markets, multi-billion incentives to help brokers, insurance companies and funds buy stocks, and companies to make share buybacks. And there is much needed assistance for the property sector, including lower mortgage downpayments, support for local government-owned enterprises to buy unsold inventory from property developers, and plans for recapitalisation of China’s largest commercial banks, ravaged by the property slump.