Policy easing and its implications
In the current economic environment, the largest two economies—China and the United States—are navigating through the complex waters of policy easing. While both nations are easing their policies, the underlying motivations and economic landscapes vastly differ. This thought piece aims to dissect these differences and their potential implications for global markets.
United States: Balancing resilience and inflation
The United States has embarked on a journey of policy easing amidst a backdrop of economic resilience and persistent inflation. Markets are beginning to question the necessity of the extent of this easing, given that growth remains robust and inflation continues to hover above target levels. There is a risk that the easing cycle being currently priced in proves too lenient, potentially leading to overheating of the economy.
The resilience of the US economy is a double-edged sword. On one hand, it highlights the strength of the economic recovery post-pandemic, but on the other, it raises concerns about the sustainability of such growth in the face of ongoing inflation. The Federal Reserve's balancing act between fostering growth and controlling inflation will be a focal point for investors and policymakers alike.
In addition to this there is the upcoming US election and depending on the outcome and whether Congress ends up being divided, markets may review the outlook for inflation and the Fed’s interest rate policy.
China: Navigating deleveraging and deflation
In stark contrast, China's economic landscape is characterised by deleveraging in the property sector, waning household confidence, and deflationary pressures. The Chinese government's strategy, under President Xi Jinping's leadership, aims to avoid increasing debt and to redirect capital flows towards more productive areas such as technology and high-value exports. This strategic pivot is designed to encourage consumption over investment and exports in the long run.
However, the reality on the ground is daunting. Property investment continues to decline as excess housing inventory is wound back. Producer prices have been on a downward trajectory for 24 months, and the Consumer Price Index (CPI) has dropped to 0.4 percent from 0.6 percent, signifying ongoing deflationary pressures. In response to these challenges, Chinese authorities have rolled out a series of monetary and fiscal measures aimed at stimulating the economy.
Monetary and fiscal measures
In late September, China announced a comprehensive package of measures, including a 50 basis point reduction in the bank reserve requirement ratio, effectively freeing up 1 trillion yuan for bank lending. Additionally, there were cuts of 15-25 basis points to several key benchmark interest rates, an average 50 basis point reduction in mortgage rates, and a reduction in the minimum housing down-payment to 15 percent. The package also included a swap facility providing 500 billion yuan for funds, insurers, and brokers to buy stocks, as well as 300 billion yuan in low-cost PBOC loans for commercial banks to purchase shares and engage in buybacks.
Despite these measures, the market remains cautious. The announcement of a minor fiscal stimulus in early October, which involved bringing forward part of next year's budget spending to the tune of 100 billion yuan, failed to meet investor expectations. As a result, Chinese markets, which had shown a remarkable 24 percent increase in the wake of the September announcement, faced disappointment once again.
The US election result may also implications for the Chinese economy. In a world of even higher tariffs and strained relations, the Chinese authorities may have to undertake even more aggressive policy stimulus.
The road ahead: Stabilisation over stimulation
Looking forward, the appropriate lens through which investors should view China's economic policy is one of "protecting the downside to growth" rather than expecting a grand stimulus that would significantly boost growth. The cyclical highs and lows in China's economy are trending lower, influenced by demographic factors, debt constraints, and structural headwinds. The authorities now seem to accept that the benefits from large infrastructure spending packages are offset by higher debt levels and interest costs.
In terms of the equity market, China should be considered more of a tactical position rather than a strategic one in portfolios. The constraints to growth, coupled with policy and regulatory uncertainties, necessitate active management of the China weight and stocks.
In conclusion, as the world's two largest economies chart their courses through policy easing, the differences in their economic landscapes and strategic priorities will have profound implications for global markets. While the US grapples with balancing growth and inflation, China focuses on stabilising its economy amidst deleveraging and deflation. Investors should navigate these complexities with a keen eye on policy developments and market responses.
