The Fiscal Stimulus Saga
On Saturday (October 12, 2024) we had another set of announcements from the Chinese authorities as China’s finance ministry unveiled a fiscal stimulus package aimed at reviving the economy and achieving the government’s growth target. However, we did not hear about the 2 trillion yen that was touted as a possible outcome. The truth is, despite the usual clamouring for everything yesterday, it doesn’t really matter unless you’re a day trader. What does matter is the general direction of travel and the mood music emanating from the Communist Party leadership, or Xi for short.
If the current stimulus isn’t sufficient, they will do more, and we can expect further announcements on converting unsold homes into social housing. However, it still hasn’t addressed the most significant issue. This remains a lack of demand-side stimulus and cash-style handouts. If we want to know how those can get things going, we just need to look at America during the pandemic period. Nothing helps animal spirits and improves demand quite like free money. Simmering in the background are the deflationary numbers, which again this weekend prove the size of the task to change said spirits; core inflation is hovering just above 0%.
Over the last few weeks, the downside risks to the economy have lessened, so it seems reasonable to assume the bottom is in for Chinese assets. Right now, calling China ‘uninvestable’—probably its most popular one-word description—seems to fail to acknowledge the dramatic change of tone from the Chinese government. Again, we would refer back to their cancellation of the zero-Covid policy; it was done with lightning speed, and the effects were felt immediately. This is what autocracies are capable of.
The Chinese markets on Monday morning (October 14, 2024) were positive but somewhat muted. Yes, they hope for more, but it would be dangerous to short this market or even stay wholly on the sidelines; if they haven’t done enough, they will do more—it’s that simple.
The pause for thought and any pullbacks potentially offer better conditions for the more skilled active managers in China and Asia. Straight-up market moves only benefit those positions that have already been made. Volatility in markets in an upward direction is the dream condition for active managers, and what happens daily or even weekly doesn’t matter.
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