This is an audio transcript of the Unhedged podcast episode: ‘Is the China stimulus package enough?’
Katie Martin
Well, nobody saw that one coming. Suddenly, stocks in China, possibly this year’s most hated asset class on Earth, have rocketed higher. What’s going on? Is it a massive economic recovery, the end to trade wars? No, none of that. Good old-fashioned stimulus from the Chinese authorities, including the central bank.
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And the scale of the jump in stocks here is really something. We’re talking like 23 per cent or so in the past week. And suddenly the Hang Seng index in Hong Kong is doing better than the US S&P index this year. So today on the show, we’re asking what have the authorities done and why is the market move so enormous?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist at FT towers in London, and I’m joined down the line by the bright young thing of the Unhedged newsletter and low-key China wonk, Aiden Reiter. Aiden, how are you doing?
Aiden Reiter
(speaks in Chinese). I’m good.
Katie Martin
I was really hoping you were gonna say something in Chinese. Introduce yourself properly in Chinese and impress me.
Aiden Reiter
Ni hao. (Speaks in Chinese) How do you say financial journalist? (Speaks in Chinese)
Katie Martin
That’s gonna really upset the people who transcribe the podcasts. So that’s good. Let’s make life difficult for people. So, Aiden, I say like no one saw this stimulus coming. Are you gonna say I’m wrong? Are you gonna say that you did see it coming because you’re so clever about China?
Aiden Reiter
No, I’m not gonna say I did see it coming. But Rob and I did write a column a few months back saying, you know, China could do more to boost its economy. And a lot of people said that. So I’m not gonna say anybody saw this coming. But a lot of people have been pointing towards China saying, you know, now why exactly aren’t you going to do more stimulus?
Katie Martin
Yeah. When is the bazooka? When are you gonna do something to turn this around? So we’ll come on to why they’ve done what they’ve done in a second. But first of all, what have they done? Because there’s just a whole like flurry of announcements and quite an unusually large amount of fanfare that came with it, right?
Aiden Reiter
Yeah. So last Tuesday, the People’s Bank of China came out and announced a bunch of monetary policy stimulus measures. So they did four things. They lowered the reserve ratio. So they said: banks, you don’t need to have as much money on your balance sheets. Start boosting up that (inaudible). They did a small rate cut to the policy rate. They made some revisions on household mortgages, so it made it cheaper to hold a second home and buy real estate assets.
And then they made this pool of capital. It’s about $114bn worth of capital. And they said two things can be done with it. One, asset managers, investors, you know, insurance companies, this is money for you to borrow to improve your balance sheets to go and buy some equities. And then they gave money to companies and said, hey, companies, time for you to go do some stock buybacks. And, you know, the very explicit point of that is to get people to go into the Chinese stock market, which has not been very lively for a long time.
Katie Martin
Yeah. And it’s interesting, though, isn’t it, because it is a mix of like it’s a specific effort to push up the market. This isn’t just one of these like rounds of stimulus where you have a load of economic stimulus and, you know, if the market goes up, so be it. Like, they specifically want the market to go higher.
Aiden Reiter
Yeah, it’s interesting because they have announced since then that they’re going to do these broader economic stimulus, which will complement this. But they started with the monetary policy stimulus, which I read as, hey, we need to fix this as an external, you know, we need to fix the stock market and then we’re going to focus on the economy. But other people can interpret that differently.
Yeah. So we’d actually written right after this happened, like, this is an interesting monetary policy experiment, right? Are you gonna be able to boost stocks sustainably if you’re doing this type of stock-focused monetary policy support? And we said, you know, the thing that could give this actual legs is that if they were going to do fiscal policy as support. And lo and behold, the next day, last Thursday, they said, hey, by the way, we’re doing some actual fiscal policy stimulus.
Katie Martin
Yeah, because I remember after the first set of announcements, like, various investors were saying to me, this is all well and good, but until they do fiscal, nothing’s gonna work. And then boom, have some fiscal policy on top of it. So, like, Chinese authorities are really serious about this.
Aiden Reiter
Yeah, I will say they haven’t put a lot of numbers to those fiscal stimulus. So they have said we’re gonna do fiscal stimulus. And then there’s been like reporting from Reuters and some other places about what that will be, but they haven’t actually announced what those programmes will actually entail. So we have the promise of fiscal stimulus to come. And I can go into those reported numbers if we want, but we only really have the actual details from the government on the monetary stimulus.
Katie Martin
I mean, the thing is, this is absolutely like the textbook example of just show your intention. Honestly, like the market doesn’t super care about details and all the time it’s just like, tell us what your intention is here. And that has very much come across.
But so why have they done this? So, you know, the basic kind of thinking among sort of global asset managers around China is they’ve got a horrible problem with the property sector. And this has just been like a train wreck for the longest time and they’re really struggling to turn it around. It accounts for, I mean, you’d know better than me, it’s about what, a quarter of the economy and it’s a massive part of household savings over there. It’s like wealth tied up in property. And it’s just been like a horrible disaster for a long time.
And the thinking was, well, if they can fix the property sector, then I’m sure the rest of the economy will bounce back. And they’ve made some efforts to fix the property sector, and the rest of the economy has just done nothing. Is that for you like the kind of driving force here?
Aiden Reiter
I think that’s definitely the big driving force in terms of investment, right? So most households, their main assets are their real estate. So if your main asset is continually depreciating because the market’s just so terrible, you’re not gonna throw your money into stocks. And stocks have, of course, been really low because of that. I mean, they’ve been low for other reasons, too, but that is one of the key drivers for this low growth.
We should note that like China’s, you know, domestic economy has not been so great in the past couple years, right? Domestic consumption and consumer confidence are at all-time lows. People aren’t actually going out and buying things. There’s, you know, a bit of a gap in trust with the government and the stimulus that’s occurring.
There is still some growth, right? You’re seeing this huge tension with the US and with European powers because there’s growth, especially in certain manufacturing sectors, and that’s with government support. And the idea is, you know, we’re gonna boost these quote unquote, high quality development sectors and that’s going to get us through this hurdle as opposed to boosting domestic consumption, which is why you’ve had so many people saying, hey, China, you should do some fiscal stimulus internally. And the government has almost baulked at it since then, right? They’re like, we want high-quality development. We don’t want this, you know, handout, support-our-people kind of development.
Katie Martin
Yeah, it’s really interesting, isn’t it? I mean, for you as someone who’s been, you know, you’ve lived in China, you’ve spent a long time looking at China, what does this all say to you about what the economic model is like? How significant a moment is this for the Chinese economy?
Aiden Reiter
I think it’s a significant moment in this past couple of years since they have been so resistant to doing these types of stimulus efforts. You know, they have a lot of highly indebted local governments. They actually, in the past couple of years with concerns over debt and the concerns of broader financial stability, they said, hey, local governments, we’re gonna stop giving you support in the same way we used to. So they’ve actually kind of even hit, pump the brakes on local investment while the real estate market has also been destroying local government balance sheets and the government’s balance sheet as well.
So it’s a really big deal in the sense that in the past couple of years, most of their focus again has been on quote unquote, high-quality development and getting support to certain industrial sectors as opposed to helping Chinese domestic consumers. They’ve been kind of flicking at helping consumers in the past couple of months, but it hasn’t been full-throated, right? So they’ve lowered rates and they said we’re gonna do these interesting buyback programs to get people to, you know, turn in their old vehicles and get new vehicles. But that hasn’t really been successful today. So this might be a full-throated hey, we actually need to do something. But again, we haven’t gotten the specifics of that fiscal stimulus package.
Katie Martin
Yeah. Is it cynical to suggest that, you know, they can see the US election coming down the pipe? They know that Donald Trump, if he wants to be re-elected, he’s got some really harsh tariff projects in mind for China. Are they trying to get ahead of US politics here at all?
Aiden Reiter
It’s unclear to me. I mean, I’ve seen pundits suggest that. But really, I do believe this was motivated or at least it seems it was motivated by internal pressure and the internal need to turn things around. We should also note that, yes, while China is slowing their growth, they’re still growing at 4.7 per cent. The US and the UK would love that. It’s just low by China’s standards.
Katie Martin
(laughter) Yeah, exactly. Economically, do you think it’ll work?
Aiden Reiter
I’m not sure the stimulus will work, right? As you said, intention is a lot, but at the end of the day, stocks are supposed to be reflective of an economy. You can’t just do these supports for stocks and then allow the economy to . . . And that will be, you know, this huge rebound, right? Unless you actually have a full-throated fiscal stimulus that changes the real estate market specifically and gets people to buy stocks and invest and invest in the economy because they feel like their other assets are safe, it’s hard to imagine this will be a long-running trend.
Perhaps also worth noting, there’s been this issue, and Unhedged has written about it a couple of times, with bond-buying in China, where people have just piled into government Treasuries because they have nothing else to put their money in. And the government has not liked that. Interestingly, when they’re really not like that.
But, you know, you could look at this monetary stimulus measures and say, actually all this is gonna do is support bond-buying. If you lowered the policy rate, that supports long-end Treasuries. And then if you also, you know, lower the reserve ratio for these banks and encourage them to lend, if Chinese households aren’t borrowing, they’re gonna put that money into Treasuries. So this is just gonna go against what China’s been fighting.
Katie Martin
Whether it works economically or not, we don’t know yet. But we do know that markets are super excited about this. I mean, like, it’s been a massive like more than 20 per cent jump in Chinese stocks. I’ll be interested in your thoughts around, like, why has this market reaction been so massive? And let me tell you my theory. You tell me if I’m wrong.
Aiden Reiter
Please.
Katie Martin
Like, literally about three weeks ago, I wrote a column in the FT saying everybody hates Chinese stocks. Like, I was speaking to the extremely French, very generous with his time, Vincent Mortier from Amundi asset management over in Paris. And he was saying that like when he tries to talk about China investment strategies to his clients, they’re just like, no, next. Like, he has not been able to get anyone to buy China for a really long time. And he’s like, you know, this is like the world’s second-biggest economy. Yes, the market is terrible at the moment, but it will turn around at some point. You really should have some sort of allocation to China and clients have been saying, nope, not interested. This thing is bad. There’s a US election coming, I’m not having it.
And you know, my sense is that like the Chinese market was just so underowned by global investors that you have any sort of dollop of good news, any signal of intent from the central bank and from the Chinese government that like, we want to turn this around and ka-boom. So is the power of positioning right for me? Do you think that tracks?
Aiden Reiter
I think that tracks a lot, right? You have people coming in to this market that was really underowned. It’s gonna see a huge surge. And again, if it’s based on the idea that there could be some real economic stimulus in the last quarters of this year, then, you know, there’s something there. But I’ll say that some of the issues the Chinese equity is . . . aren’t just that the Chinese economy and domestic economy has been doing great. There’s a lot of questions about trust, about government disclosure, about opacity that have stopped foreign investors from coming into Chinese equities to begin with. And those things haven’t changed at all.
Katie Martin
Yeah. When they have like a change of heart on the regulatory front about a particular sector or whatever it is, do not stand in the way of it is my very strong advice to you (Aiden laughs) because you will lose.
Aiden Reiter
You will always lose, yeah.
Katie Martin
Like, you know, we’ve seen this over and over again with like the education system, with the tech sector, you know, all of these sectors have like been turned over by kind of regulatory changes of heart. So yeah, that’s definitely a risk, you know; it’s China.
Aiden Reiter
It seems like those things are getting worse also, you know. So there was some great reporting in the FT by our colleagues in China who wrote about how China is, quote unquote, throttling its entrepreneurs and private sector. So these things aren’t changing. If anything, they’re getting worse. And, you know, yes, there could be some big stimulus that gets you into the market, but you still have to be really wary of what’s going on in the domestic political scene and how they’re going to impact the actual industries at play here. That being said, if you’re investing in the right industries, right, the quote unquote, high-quality development industries, whether that’s EVs or solar or, you know, cars, that has government, you know . . .
Katie Martin
Yeah, one of these preferred sectors.
Aiden Reiter
Exactly. Those have government tailwinds. So that might be a good investment if you’re able to isolate those equities.
Katie Martin
Yeah. It’s worth bearing in mind that the massive jump that we saw in stocks comes ahead of like a holiday, right, in China. So maybe some of this kind of market run-up is a bit front-loaded to kind of get your bets in before the market shuts. So do you get the sense that, you know, this holiday, you know, notwithstanding, you think this will last, this pick-up in Chinese stocks?
Aiden Reiter
Yeah, it’s national week so, you know, China is celebrating its independence this coming week. It’s a really fun week. I have very fond memories of travelling around China during this when I was living in China. But in terms of whether or not this will extend past that week, I’m not so sure, right? This could be initial sentiment. People want to get in on the idea that the economy will get the necessary stimulus and the markets will surge because of it. It’s unclear what the actual stimulus will be. Investors might get annoyed in a couple of weeks if they still haven’t gotten anything real from the government in terms of actual fiscal stimulus.
According to Reuters and again, this is just, you know, reporting so far, there’s gonna be Rmb2tn worth of stimulus. Half of that is gonna go to actual like handouts to families and households and, you know, some of these government buyback schemes that existed already. And then part of that is gonna go to, you know, the real estate market and addressing some of the major structural like hurdles of local government debt, which again, could be really beneficial. But again, we haven’t actually gotten that word from the government.
Katie Martin
It’s just so interesting. The timing has just completely blindsided everyone and I kind of love it for that.
Aiden Reiter
Katie, you’ve been reporting on markets for a while. Do you remember when, you know, there have been moments where Chinese equities did decently well, or at least better that they’re doing now. Do you remember what the sentiments were around that, say, pre-2015?
Katie Martin
I’m struggling to think of a kind of a bounceback on this scale for a really long time. I mean, I think it’s the biggest run-up in Chinese stocks since 2008 so, you know, I’ve seen some really bad days out there, but I can’t think of like any really good periods like we’ve had in the past few days. So, I mean, yeah, don’t stand in the way of it. This is uh . . . This feels real.
Listeners, if you disagree with me, you’re very welcome to. Do you think this thing is gonna last? Do you think it’s not gonna last? Either way, email me: katie.martin@ft.com. Additionally, if you’d like to complain in Chinese, then you can email aiden.reiter@ft.com. The spelling of his name will be in a blurb somewhere.
Aiden Reiter
I welcome all comments in Chinese and other languages.
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Katie Martin
We’re gonna be back in a sec, Long/Short.
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Alrighty, it’s time for Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Aiden, what you got?
Aiden Reiter
I am long morning swims. I have been living in . . . Yeah, it’s a great feeling, jump in the water in the morning. I’ve been living in Bowery, and this is somewhat related to China, but I’ve been living in Bowery in Manhattan, which is near the Chinatown YMCA. So I go at 6.30am and it’s me, 20 Chinese old ladies and old men, and we swim laps together. And it’s just a wonderful way to start the day.
Katie Martin
That sounds nice.
Aiden Reiter
Yeah, it’s been really lovely.
Katie Martin
That’s very wholesome. I am long again of people coming up to me at weddings when I’ve had a large number of adult beverages to say that they love the Unhedged podcast.
It’s felt really weird when people in real life come up to you and say, oh I listen to on your podcast and I like it and it’s nice. So we’re gonna wrap it up there. No one else is getting married that I know between now and Thursday. So we will be back in your feed then.
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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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