Don’t expect China’s economic stimulus measures to continue to drive global markets
- Nicholas Spiro says Beijing’s deleveraging campaign limits its room to shore up the economy
- Global tightening, rather than China’s economic woes, was the main cause of last month’s steep fall in asset prices
It has been quite a while since Chinese equities enjoyed a nearly week-long rally. Since last Monday, the CSI 300 index of mainland shares has shot up nearly 7 per cent, putting it on track for its longest rebound since February, according to data from Bloomberg. The world’s other leading equity markets also had a good start to the month, following a brutal sell-off in October. Since last Monday, the benchmark S&P 500 index is up more than 3 per cent while the Stoxx Europe 600 index was up more than 2 per cent.
Among the triggers for the tentative recovery in Chinese shares was last Wednesday's signal from Beijing that it planned to introduce further stimulus measures in response to persistently weak economic data. A gauge of new orders for exports fell deeper into contraction territory last month in a sign that the trade war is taking its toll on manufacturing activity. While China has been easing policy over the past several months, mainly in the form of tax cuts and regulatory relief, investors have been disappointed with the modest and incremental steps taken so far.
The global rallies that followed the launch of previous rounds of Chinese stimulus, notably in 2011-12 and 2015-16, showed that policy easing in the world’s second-largest economy has the potential to significantly improve sentiment. Even the “mini-stimulus” introduced last July, which included injections of liquidity into China’s banking system and more support for infrastructure projects, was partly responsible for the strongest upturn in global markets since last January, measured by the monthly gains in equity and corporate debt markets.
Yet, the likelihood of current stimulus measures becoming a key driver of global asset prices is slim.
First, as JPMorgan noted in a report published last Friday, China’s “relatively limited policy manoeuvrability” weakens the credibility and efficacy of Beijing’s efforts to shore up growth and restore confidence in the country’s stock market.
While Chinese regulators have become more concerned about the severity of the fall in share prices this year, the constraints imposed by the deleveraging campaign limit the scope and magnitude of growth-supportive policies. Instead of the aggressive and broad-based monetary and fiscal loosening that characterised earlier rounds of stimulus, Beijing is simply undoing part of the recent fiscal tightening that exacerbated the slowdown in credit growth and infrastructure spending.
Targeted and sporadic easing measures – cuts to banks’ reserve requirements, pledges to support private firms and steps to reduce the threat of margin calls – are doing more to fuel volatility in China’s stock market than turn sentiment around. The assurance that policymakers will do whatever it takes to shore up markets and boost growth – the so-called “Beijing put” – is conspicuously absent this time round. Last week’s rebound in stock prices had more to do with hopes that US-China trade tensions were easing than expectations of a sweeping stimulus package.
Second, last month’s dramatic sell-off in global markets had little to do with China’s economic woes.
It was the further tightening in financial conditions that was the trigger for the steep declines in asset prices. Global bond funds suffered net redemptions of US$36 billion in October, the largest withdrawals since December 2015, according to figures from EPFR Global, a provider of data on fund flows. Outflows from China, on the other hand, while having picked up over the past month or so, have been negligible this year.
The bond sell-off put equity markets under severe strain, fanning fears about the future growth of US corporate earnings. The popular technology sector, which has driven the rally in stock markets, has become the focal point of investor anxiety, partly because it remains the most crowded trade in markets, according to last month’s fund manager survey published by Bank of America Merrill Lynch.
In a sign of where the nervousness in markets is most pronounced right now, the tech-heavy Nasdaq Composite index has plunged 8.5 per cent since the start of October compared with a loss of 4.3 per cent for China’s CSI 300 index. The turmoil in the tech sector, which was made more acute by last Thursday’s sharp fall in the shares of Apple as the company announced it would no longer report unit sales of its flagship iPhones, threatens to pull the rug out from under the once-resilient US equity market.
More worryingly, it is not just Beijing that has limited room for manoeuvre in easing policy. Major central banks in advanced economies, led by the Federal Reserve, are unwinding their ultra-loose monetary policies, fuelling volatility in markets.
Investors are not only being deprived of the Beijing put, they are having to cope with diminishing support from the world’s other leading sources of largesse. October’s market rout could well be a foretaste of things to come.
Nicholas Spiro is a partner at Lauressa Advisory