Our Chief China Economist Robin Xing and Chief China Equity
Strategist Laura Wang discuss how markets have responded to rate
cuts and commitments to government spending, and what they could
mean over the long term.
----- Transcript -----
Laura Wang: Welcome to Thoughts on the Market.
I'm Laura Wang, Morgan Stanley's Chief China Equity
Strategist.
Robin Xing: And I'm Robin Xing, Morgan
Stanley's Chief China Economist.
Laura Wang: All eyes have been on China
this past week, and today we'll discuss why recent news from
China's policymakers have commanded the attention of global
markets.
It's Thursday, October the 3rd, at 4pm in Hong Kong.
So, Robin, China has been wrestling with the triple macro
challenge of debt deflation and demographics -- what we call the
three Ds -- for some time now. Last week, China's central bank,
PBOC, announced a stimulus package that exceeded market
expectations. And then later in the week, top China Communist
Party officials, known as the Politburo, focused their monthly
meeting on economics, which is not their usual practice.
This meeting was a positive surprise to both us and the market.
Let's start with the PBOCs easing package. For listeners who
haven't been following China's economy closely, what's our
current view on China's economy and can you walk us through the
policy measures that the central bank introduced?
Robin Xing: China's economy has been
struggling lately and that's pushed the Beijing to pivot
approach. Over the last 18 months, they have tried smaller,
reactive measures. But now, they are doing something much bigger.
On September 24, the People's Bank of China, PBOC, made a bold
move, cutting interest rates and introducing new tools to support
the stock market.
Now, these cuts might sound small, just 20 basis points, but they
are pretty rare in China. They also cut the reserve requirement
ratio, which is a fancy way of saying banks can lend more money
by 50 basis points. And for the first time, the central bank gave
forward guidance, signaling even more cuts could come by year
end.
On top of that, the PBOC launched two big programs, a 500 billion
yuan fund to help investors buy stocks, and a 300 billion yuan
program to help companies buy back their own shares. These moves
gave a much-needed boost to both the markets and consumer
confidence.
Laura Wang: And how about the Politburo
meeting that came on the heels of the PBOC announcement? What
exactly did it focus on?
Robin Xing: The Politburo meeting was a
rather critical moment. Normally, they don't even talk about the
economy in September. But this year was different. It really
signaled how urgent things have become.
They made it clear they are ready to spend more. The government
is pledging to increase public spending because other parts of
the economy, like corporates and consumers, are holding back.
There is also a big focus on the housing market, which has been
in decline since 2021. They are promising to stop that slide, and
it's the strongest commitment we have seen so far.
Laura Wang: So, given everything we've seen
from the PBOC and the Politburo, do you think this is a ‘whatever
it takes moment’ to address the macro challenges facing China's
economy?
Robin Xing: Not quite, but it's close. We
are seeing the start of what's going to be a bumpy recovery. The
deflation problem, where prices are falling and people are not
spending, is complicated.
Beijing seems open to trying different approaches, but fixing the
deeper issues -- like the struggling housing market and the local
government debt -- it’s going to take a lot. In fact, we think
China might need to spend about 1-1.5 trillion dollars over the
next two years to really turn things around.
Right now, the measures they have announced are smaller than
that. That's because these are new policies. And they still need
to build consensus and work out the details. So, while this isn't
a ‘whatever it takes moment’ yet the mindset has definitely
shifted in that direction.
Laura Wang: In this case, what are the next
steps you are monitoring for China's policymaker and how long
will the various measures take to implement?
Robin Xing: We expect to see a
supplementary budget of 1-2 trillion yuan announced at the
upcoming NPC Standing Committee meeting in late October. This
budget should focus on boosting consumer spending, increasing
social welfare, and helping local governments managing their
debt. We will likely see more monetary easing too.
As well as tweaks to the Housing Inventory Buy Back program.
These steps should help the economy grow slightly faster,
possibly hitting a 5 per cent quarter on quarter growth over the
next two quarters, compared to the 3 per cent we have seen
recently.
Looking ahead, we will get more clues at the December Central
Economic Work Conference. That's when we might see the first
signs of plans to use central government funds to tackle housing
and local government debt issues. The full details could come in
March 2025. If things don't improve quickly, and especially if
social unrest starts to rise, Beijing may have to act even more
aggressively.
We are keeping an eye on our social dynamics indicator, which
tracks how people feel about jobs, welfare and income. If that
dips further, it could push the government to ramp up stimulus
measures.
Laura, turning it over to you. How are stock markets reacting to
all this policy signaling from China?
Laura Wang: I would say to say that the
market has responded very enthusiastically is an understatement.
I'll give you some numbers.
On the first day of the PBOC announcement, the Shanghai Composite
Index, as well as the Hong Kong Market Hang Seng Index, were both
up by more than 4 per cent in one single day. Then with the
further boost from the surprise Politburo meeting -- by now, both
the Shanghai Composite Index and the Hang Seng Index have already
been up by more than 21 per cent in just one week's time.
Robin Xing: Within the China stock market,
which sectors and industries do you think will most benefit from
the shift in policy?
Laura Wang: There are a few ways to
position to benefit from this major market condition change. We
have a list of companies that we believe will directly benefit
from the PBOC market stabilization funding, given the funding's
low cost compared to these companies implied re-rating
opportunity, just by tapping into the funding and enhancing their
shareholder returns.
For the potential reflationary fiscal efforts suggested by the
Politburo meeting, as more details come out, I think sectors with
good exposure to reflation, particularly the private consumption,
will benefit the most -- given their still relatively low
valuation, large market cap and high liquidity.
Robin Xing: Finally, Laura, what are your
expectations for the markets in China and outside of China for
the next few weeks and months?
Laura Wang: Clearly this rally so far is
reflecting significant sentiment improvement and capitals that
are willing to take a leap of faith and preposition for physical
reflationary efforts ramp up. If the government can deliver these
measures in a timely fashion, and more importantly, on top of
that, communicate their commitment to winning this uphill battle
against deflation, I think further valuation re-rating is quite
possible for both the Asia market and the Hong Kong market by
another 10 to 20 per cent.
To go beyond that level, we need to see clear signs of a
corporate earnings growth reacceleration, which would require
incrementally more easing to come along in the next few months.
We should also monitor the housing market inventory level very
closely because any earlier completion of this inventory
digestion could suggest less drag on demand investment.
Obviously, there are still a lot of moving parts and it's still a
very much evolving story from here. Robin, thanks for taking the
time to talk.
Robin Xing: Great speaking with you, Laura.
Laura Wang: And thanks for listening. If
you enjoy Thoughts on the Market, please leave us a review
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colleague today.
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