- On 24 September China’s central bank announced rate cuts, more liquidity for banks and support for the stock market and property.
- Chinese stocks had their best week in years, but the enthusiasm was short-lived: fiscal stimulus was slow to materialise.
- In emerging markets it is worth telling announcements from effective measures and waiting for the detail, the timetable and the funding.
On 24 September 2024, China’s central bank announced a broad stimulus package: rate cuts, more liquidity for banks and support for the stock market and the property sector. Chinese stocks had their best week in years. The news came after months of weak economic data and was received as a sign that the authorities were prepared to act more forcefully. The market reaction was immediate and showed how much a gesture of that kind had been awaited.
What happens in China matters to Europe and Spain in several ways: it is a major buyer and seller of goods, it influences the price of raw materials and it shapes the performance of sectors such as luxury, cars or machinery. That is why the decisions of its central bank and government are followed closely far from Asia, although they are seldom understood precisely.
What the central bank announced
Each piece of the package serves a different function. Rate cuts seek to ease credit and encourage spending and investment; additional liquidity for banks lets them lend more, and support for the stock market aims to restore investor confidence. They are three different pieces of one message: that the central bank was prepared to support activity and asset prices.
The jump in Chinese stocks reveals how much bad news had been priced in and how heavily scepticism weighed. When a market has been under pressure for a long time, a change of tone can produce rapid and very strong rises, which sometimes reflect more the relief of those who had bet on a fall than a lasting improvement in fundamentals.
A short-lived enthusiasm
The enthusiasm was short-lived, as fiscal stimulus was slow to materialise. Fiscal policy, that is, public spending and taxes, is the other lever with which a government can boost the economy. Monetary measures make credit easier, but they are not enough on their own if public spending and the confidence of consumers and companies do not follow. Fiscal policy usually takes longer, because it requires political decisions, budgets and timetables that do not depend on the central bank alone.
Put differently, making money cheaper does not oblige anyone to borrow it. If households prefer to save and companies see no reason to invest, cheaper credit has a limited effect. That was why, in the following weeks, markets passed from euphoria to waiting for further announcements, and why it is wise to distrust the immediate effects of any stimulus package.
Announcements and measures
For investors in emerging markets, telling announcements from effective measures is essential. It is worth waiting to learn the detail of each measure, its timetable and its funding before drawing conclusions, and not being carried away by the first headline. An announcement can change perception for a day; a well-designed measure changes behaviour for years. That is why it is always worth asking whether the announcement comes with specific resources, deadlines and rules.
In these markets, information is sometimes less transparent and rules can change quickly, so political and regulatory risk is greater. Anyone with exposure, direct or indirect, should know its weight in their overall wealth and review it with the adviser. This note is general information and not investment advice. For a company with sales in China, the prudent course is to plan with scenarios and not rely on a single outcome.
In emerging markets, the small print matters.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
