One of the major events for the week that investors were waiting on was the multi-day Standing Committee meeting of China’s National People’s Congress (NPC). That concluded just a couple of hours ago, and markets are not giving much of a thumbs up to the announcements. Although the measures are likely to help solve some of the issues facing the world’s second largest economy, they didn’t have the same “wow” factor that pushed indices higher back in October.
One of the factors that analysts have been pointing to in order to explain markets aren’t responding as positively to a series of the China stimulus announcements by the Chinese government is that they have lacked details. Specifically, how much money will be spent. The thought was that the NPC would have to vote on the details of the China Stimulus initiatives. Well, that vote has happened, and it doesn’t seem to be as much as investors were hoping for.
How Much is Enough
China announced a CNY10 trillion (or about $1.4 trillion) program to help resolve the local government hidden debt crisis. China President Xi Jinping had categorized local debt as one of three major economic and financial risks facing the country, which was seen as underlying the infrastructure and housing markets. Local governments had relied on land sales to supplement spending, but the collapse of the property market was seen creating a large drag on the economy.
The amount was at the top end of what economists had expected. But markets appear to be disappointed by the lack of additional funding, since the program is based on debt swapping. That is, the central government would take on debt from local entities, instead of fostering new spending.
The Trump Factor
The timing was a bit unfortunate, as the election of Donald Trump is expected to heighten the trade war between the two largest economies in the world. Investors apparently think that China should do more to support the domestic market to offset the potential impact of tariffs and renewed reshoring to the US.
A sign of this view was showing in the weakening of the offshore yuan, and slide in Chinese government bonds. Chinese officials hailed the announcements as significant support for the economy, saying that an additional CNY2 trillion would be made available in the coming three years. Analysts suggest that the measures are supportive in the sense that they help prevent further deterioration in local markets, but the package so far lacks the punch of pro-growth initiatives.
What Happens Now?
Analysts believe that Chinese officials will come back with more stimulus, once there is more clarity on the impact of the current program and what effects a future Trump presidency will have on trade. Investors are now looking to the Politburo meeting in December, scheduled to discuss the economy ahead of the Central Economic Work Conference. As much as another CNY12-13 in additional stimulus could be announced, according to analysts, which might help China return to its target growth rate of 5.0%.
Commodity prices have continued their slide after the announcements from Chinese officials. They are struggling also because of the stronger dollar. Markets are still processing the implications of the election, but that might calm down after the weekend provides a pause for reflection. Commodity traders, and their currency counterparts, might turn their attention to the US for signs of growth.
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