Following our update on China last week, further and significant extra stimulus measures have been announced. Therefore, with all these changes, we thought we should give a second update answering the most common questions we have had concerning China over the last few days.
1.China’s announcements have been compared to Drahgi’s “Whatever it takes” speech, where he was credited with rescuing the Euro and possibly the whole EU structure. Is it that big of a deal?
China’s communist leaders were not in immediate danger of experiencing a full-blown existential crisis. Still, the number of citizens unhappy with the economy’s trajectory, their investments or property valuations was undoubtedly increasing. While signs of displeasure within the communist state and its leader are hard to gauge and come with considerable risk, it became increasingly clear that the authorities needed to act. To rekindle animal spirits and stop the downward spiral in property prices and equity valuations, they were required to provide a genuinely game-changing raft of monetary and fiscal measures. Evidence suggests they realise both the seriousness of the situation and can deliver suitable support measures to stimulate the economy and address the dysfunctional property market.
Of particular importance to us as overseas investors, the actions of the Chinese regulators and the PBoC are very supportive of their equity markets, and the incredible returns of the last week are a testament to that. So, we think the comparison to Draghi’s famous comments is largely justified.
2.Will the rise in asset prices be more sustained this time, as we have seen several previous rapid gains in Chinese equities only for them to fall back down again?
We believe the gains will be more likely to be sustained this time because the alternative to stimulating the economy and supporting the stock market is widespread discontent and an increasing risk to the communist party government. The headwinds remain considerable, whatever the stimulus levels, and even Xi acknowledged this in his speech on September 30th, marking the 75th anniversary of the People’s Republic of China. “We may encounter major tests such as high winds or even rough seas”. This unusual public acceptance of the economic realities leads us to believe President Xi understands and will directly address the difficulties.
3.Who could be the other winners apart from the Chinese themselves?
A resurgent Chinese economy will benefit many geographies and sectors, including commodities, European luxury goods, and travel and tourism throughout Asia.
4.Could the US election and possible return of Donald Trump undermine the stimulus efforts?
Yes, they could, but the Chinese authorities’ current actions are possibly partly predicated on a more hawkish US administration, whether Republican or Democrat. Few things unite the political parties in the US, but a general antithesis towards China is one of them, and we don’t expect this to change anytime soon.
5.Why haven’t authorities announced more fiscal stimulus yet, and will they be doing so?
Although voting on fiscal stimulus could be seen as pure window dressing, the necessary hoops still need to be jumped through. This will delay the announcements that many observers of Chinese economic policy see as inevitable. As much as anything, the coordinated and better-choreographed delivery of the stimulus and the associated rhetoric causes are the root cause of so much optimism.
6.Is there still a risk that China will invade Taiwan?
“Taiwan is a sacred territory of China, and the people on both sides of the Taiwan Straits are connected by blood, and blood is thicker than water.” This is another quote from Xi’s 30 September speech, in which he reiterated the Chinese authorities’ desire to unify China and Taiwan. There was no news in this speech regarding Taiwan, so the risks remain. That said, with such a public acknowledgement of the harsh economic realities, it would be somewhat surprising for China to conclude that now is the time to embark on a path that would inevitably lead to massive economic disruption.
In summary, the announcements coming out of China seem significant, but while the markets have once again responded positively, each time the authorities fail to follow through, their credibility is compromised, and this time, it appears to be truly on the line.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
IAM 187.9.24