On 24 September, the PBOC (People’s Bank of China) unveiled a major stimulus package to support economic growth, promote the expansion of consumption and investment and throw a lifeline to struggling industries and sectors.

The central bank also announced a 800-billion-yuan ($114 billion) lending pool to help fund managers, insurers and brokers buy more stocks and initiate share buybacks.

China’s stock market indices reacted positively to the news with Hong Kong’s Hang Seng index making a 12.9% weekly gain and the local CSI 300 index gaining 15.7%.

There were also moves to stimulate the Chinese property market including a cut in interest rates for existing mortgages and the minimum down payment on all homes was reduced to 15% from 25%.

On the 25 September, the central bank went a step further, cutting the interest rate on its medium-term lending facility from 2.3% to 2% and promising to cut the amount of cash banks have to hold in reserve which would free up around a trillion yuan ($142 billion).

WHY IS BEIJING ACTING NOW?

President Xi Jinping has been under pressure since March to boost the country’s flagging economy, with a growing likelihood it would miss its 5% GDP (gross domestic product) growth target for this year.

Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity fund (BW9HL13), believes China’s problems come from a prolonged period of lockdowns followed by stalling growth and weaker consumer sentiment.

‘A lack of resolute measures to stimulate demand and clampdowns on technology, real estate, and the education sector further dampened sentiment,’ says Altaf.

‘High levels of youth unemployment and the demographic challenge of an ageing population have also created headwinds to growth.’

China’s imports rose by just 0.5% from a year earlier in August compared to 7.2% growth seen in July, while retail sales missed expectations with a year-on-year rise of 2.1% narrowly, only just above their previous post-pandemic low.

Analysts at US investment bank Goldman Sachs responded to the latest disappointing data by cutting their forecast for China’s overall economic growth this year from 4.9% to 4.7%.

WHAT DOES THE STIMULUS PACKAGE MEAN?

Last week’s intervention could help with economic recovery, but some investors remain sceptical says Quilter’s Lindsay James: ‘Following on from the rate cut in China, and its package of property and market stimulus offerings, markets across Asia have rallied on hopes that this will be a turning point for the Chinese economy.

‘The difficulty with this is investors won’t necessarily know if it is. Economic growth data is opaque and widely mistrusted, and multinationals are leaving the country in swathes. Data that was once a good signal of investor appetite, such as foreign-investment inflows, is now published only sporadically rather than daily.

‘Investors rely on heavily on data and good quality corporate access. With both now harder to come by, the efforts of the Chinese government to rightly act to stimulate what is a struggling economy are not likely to be enough to tempt foreign investors back in any size.’

GAINS FROM STOCKS AND FUNDS

While investors may be sceptical about the long-term implications of the stimulus package and benefits to their portfolio, what is clear is traders have been piling into stocks and funds with exposure to China to make sharp short-term gains.

Over the past week, mining stocks have benefited from the China stimulus package announcement with Anglo American (AAL), Antofagasta (ANTO), Glencore (GLEN) and Rio Tinto (RIO) all making progress.

On 27 September, financial services firm Prudential (PRU) was the biggest riser on the FTSE 100 index climbing 3% on the day, while Standard Chartered (STAN) was up 6% on the week.

Luxury retailer Burberry (BRBY) made double-digit gains over the course of the week, with major European luxury stocks such as LVMH (MC:EPA) and Hermes International (RMS:EPA) also in demand.

FUND MANAGER PERSPECTIVE

Fund manager Altaf expects the latest stimulus package to have a positive effect on his fund with more policy support ahead from the Chinese central bank: ‘In the few days since the announcements, Chinese stocks have rallied significantly, which has proved a favourable tailwind to our fund.’

The fund has just over 30% exposure to China and over the past 12 months is up 24.3% versus 13.2% for the MSCI Emerging Markets index.

‘In recent weeks we had been increasing our allocation to China. Pessimism had reached extreme levels and with low investor positioning we felt the risk-reward had become much more favourable.

‘We therefore reduced our exposure to some defensive areas and increased allocations to more pro-risk China names. These include car manufacturer Geely (175:HKG), retailers JD.com (JD:NASDAQ) and Alibaba (BABA:NYSE), Tencent (700:HKG) and pharmaceutical Sino Biopharm (1177:HKG),’ says Altaf.

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