Will the Chinese medicine work?

Can China avoid turning Japanese? A bold Chinese stimulus package launched last week was an attempt to stop a vicious circle of falling asset prices and consumer deleveraging. Authorities hinted at more sizeable fiscal support ahead. The parallels between today’s China and Japan’s extended slump from the 1990s have been drawn many times. Is the new stimulus a game changer? It lifted depressed investor sentiment and contained positive measures on equity and property markets, at least here and now. Yet I think bolder medicine to support consumers and housing, as Beijing is reportedly contemplating, will be needed. In the near-term, more monetary easing seems likely. But cheaper money from the People’s Bank of China will not push worried consumers to spend if house prices are still falling, and a credible reflationary package is not consistent with authorities’ desire for a stable yuan. Having eliminated Chinese assets from our strategic allocations going into this year, we continue to stay cautious for now; the US election outcome may give the Chinese authorities the certainty needed to try more radical remedies, including on the fiscal side.

Do read our CIO Office Flash for more on the topic. For now, China’s export dependence continues to fuel global trade tensions, while its slowing economy is dragging down global growth, as a continued weakness in oil prices attests. As I told clients I met in Hong Kong and Singapore during my trip to the region last week, Chinese stimulus is just one example of Federal Reserve (Fed) rate cuts rippling through Asian markets. Setting aside US election-related and geopolitical risks, an environment of falling US interest rates, easing global liquidity and a soft landing for the US economy should, however, support Asian economies and currencies. We expect modest strengthening of the Japanese yen and the Chinese yuan against the dollar in the coming year. A weaker dollar could also improve the outlook for emerging market assets more broadly. Meanwhile, equity market dynamics are changing, with concentration in the S&P 500 having fallen markedly, and the number of stocks outperforming the index now at its highest level since 2002. We keep equity exposures at strategic levels for now and stay alert for opportunities in sectors such as materials and energy and lagging areas such as UK stocks. Our CIO Office Viewpoint this week will take a deep dive into the banking sector, which has come into sharper focus amid a global rate-cutting cycle.