The Politburo pledged “more proactive” fiscal policy, raising expectations for Beijing to widen the fiscal deficit from 3% at the annual parliamentary session in March. That would open the door to more central government borrowing to shore up the faltering economy and target consumer spending. Morgan Stanley’s China economist (who was pessimistic at the conference I attended last month) said that “China sent the most aggressive stimulus tone in a decade. But while the tone is very positive, implementation remains uncertain.”
I have argued for some time now that Beijing has no choice but to follow through and do what it takes to turn the economy around and unleash consumer spending. China needs a domestic economic recovery and cannot rely on just exports alone. The offshore yuan erased losses to trade 0.1% stronger on bets China’s economy will recover due to monetary and fiscal stimulus. Regional currencies also got a boost from the Monday statement, with Australian dollar rising nearly 1% given economic linkages to China and commodities being key beneficiaries of the pending stimulus.
While the Politburo meeting typically never reveals numerical economic targets, the statement gave important clues on future policy. The Central Economic Work Conference which begins on Wednesday, can be expected to reveal more policies and measures and confirm the annual growth goal of 5% – which is well above what the consensus economists anticipate. That meeting is set to begin Wednesday, Bloomberg News earlier reported.
While the Hang Seng lifted nearly 2.8% yesterday, the markets really endorsed the meeting outcome with a circa +9% surge in the Nasdaq Golden Dragon Index. The topside breakout confirms a continuation pattern and marks the resumption of upward momentum in my opinion. I am expecting leading China/Hong Kong indexes to follow a similar pattern and retest the October highs in the coming months.
Other highlights from the Politburo meeting, included confirming a growth target of “around 5%” will be hit by saying full-year goals will be met “smoothly”. At the meeting, leaders reaffirmed that economic stability was a priority and plans for more technology innovation and the construction of a modern supply chain. The Politburo vowed to implement economic reforms, including some “iconic” measures to open-up the economy and stabilise foreign investors and trade. China needs the world to develop, and in the words of Howard Marks, cannot rely on trade with just Russia and Iran.
Importantly, policymakers also elevated the importance of boosting domestic consumption, making it their top goal. I have said for some time that Beijing needs to get its consumers spending again. Chinese consumers have the highest savings rate in the world.
The Hang Seng also confirmed a breakout yesterday, which likely heralds the end of the correction from the October highs and a resumption of upward momentum. I would expect the October highs above 23,000 to be retested in the coming months.
One senior strategist at ANZ said that “the wording in this Politburo meeting statement is unprecedented. The policy tone shows strong confidence against Trump’s threats”. The last time China adopted a “moderately loose” monetary policy was in the GFC as part of a bazooka stimulus package to prop up the economy.
While Beijing has been determined to avoid repeating over stimulating the domestic economy, the Politburo meeting sent financial markets a message that President Xi has a new urgency to support growth promising to “forcefully lift consumption” and drive domestic demand “in all aspects.” Beijing has ample room and scope to raise its budget deficit next year. Fiscal spending is widely regarded as the most important element in any stimulus package.
Carpe Diem!
Angus
Disclosure: Fat Prophets and its affiliates, officers, directors, and employees may hold an interest in the securities or other financial products relating to any company or issuer discussed in this report. Fat Prophet’s disclosure of interest related to Investment Recommendations can be provided upon request to members@fatprophets.com.au.
Chart Source: Thomson Reuters
