Is the China stimulus package enough?

Katie Martin (0:09)

Well, nobody saw that one coming. Suddenly, stocks in China, possibly this year's most heated asset class on earth, have rocketed higher. What's going on? Is it a massive economic recovery? The end to trade wars? None of that. It's good old-fashioned stimulus from the Chinese authorities, including the central bank. Now, the scale of the jump in stocks here is really something. We're talking like 23% or so in the past week. And suddenly, the Hang Seng index in Hong Kong is doing better than the US S&P index this year. So today on the show, we're asking, what have the authorities done? And why is the market move so enormous?

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London. And I'm joined down the line by the bright young thing of the Unhedged newsletter and low key China wonk, Aiden Reiter. Aiden, how are you doing?

Aiden Reiter (1:10)

Good morning, I'm good.

Katie Martin (1:12)

I was really hoping you were going to say something in Chinese. Introduce yourself properly in Chinese and impress me.

Aiden Reiter (1:17)

Hello, I'm Reiter. I'm a financial journalist.

Katie Martin (1:25)

That's going to really upset the people who transcribe the podcast. So that's good. Let's make life difficult for people. So Aiden, I say like no one saw this stimulus coming. Are you going to say I'm wrong? Are you going to say that you did see it coming because you're so clever about China?

Aiden Reiter (1:40)

No, I'm not going to say I did see it coming. But Robin and I did write a column a few months back saying, you know, China could do more to boost its economy. And a lot of people said that. So I'm not going to say anybody saw this coming, but a lot of people have been pointing towards China saying, you know, now why exactly aren't you going to do more stimulus?

Katie Martin (1:57)

Yeah, yeah. When is the bazooka? When are you going to do something to turn this around? So we'll come on to why they've done what they've done in a second. But first of all, what have they done? because there's just a whole like flurry of announcements and quite an unusually large amount of fanfare that came with it, right?

Aiden Reiter (2:11)

Yeah, so last Tuesday, the People's Bank of China came out and announced a bunch of monetary policy stimulus measures. So they did four things. They lowered the reserve ratio. So they said, banks, you don't need to have as much money on your balance sheets. Start boosting up that lending. They did a small rate cut to the policy rate. They made some revisions on household mortgages. So it made it cheaper to hold a second home and buy real estate assets. And then they made this pool of capital. It's about 114 billion US dollars worth of capital. And they said two things can be done with it. One, asset managers, investors, insurance companies. This is money for you to borrow to improve your balance sheets to go and buy some equities. And then they gave money to companies and said, hey companies, time for you to go do some stock buybacks. And the very explicit point of that is to get people to go into the Chinese stock market, which has not been very lively for a long time.

Katie Martin (3:05)

Yeah, and it's interesting that, isn't it? because it is a mix of like, it's a specific effort to push up the market. This isn't just one of these like rounds of stimulus where you have a load of economic stimulus and if the market goes up so bit, like they specifically want the market to go higher.

Aiden Reiter (3:20)

Yeah, it's interesting because they have announced since then that they're going to do these broader economic stimulus, which will complement this. But they started with the monetary policy stimulus, which I read as, hey, we need to fix this as an external, we need to fix the stock market. And then, we're going to focus on the economy. But other people can interpret that differently. Yeah, so we had actually written right after this happened, like, this is an interesting monetary policy experiment, right? Are you going to be able to boost stock sustainably if you're doing this type of stock-focused monetary policy support? And we said, you know, the thing that could give this actual legs is if they were going to do fiscal policy support. And lo and behold, the next day, last Thursday, they said, hey, by the way, we're doing some actual fiscal policy stimulus.