No China stimulus? Time to buy
It’s a beautiful day
Sky falls, you feel like
It’s a beautiful day
Don’t let it get away
– U2
Do not buy Chinese stocks because you think a large fiscal stimulus is coming. Buy Chinese stocks because a large fiscal stimulus is not needed.
The bull case for Chinese equities is not that stimulus will rescue the economy. The bull case for Chinese equities is that households are sitting on US$20 trillion in deposits with nowhere to go.
The controlled demolition of the property sector is ongoing. Regulators have curtailed wealth management products and their implicit guarantees.
Capital controls prevent easy access to foreign assets. And the coming flood of high-tech hardware companies in clean energy, semiconductors, aerospace, robotics and biotech will need a vibrant equity market to get off the ground.
China’s economic transformation will be ill-served by flood-the-zone stimulus which – if we recall – is what got us the real estate bubble and subsequent “three red lines” credit restrictions in the first place. What China’s economic transformation needs is better implementation of “establish the new before abolishing the old.”
What should we make of China’s recent stimulus measures? The grab bag of goodies – reserve requirement ratio (RRR) cut, lowered interest/mortgage rates, special local bond sales, cash for clunker programs – are all bullets pointing in the same direction. But the firepower falls well short of a bazooka.
Trillions of renminbi (RMB) in fiscal stimulus have been dangled but apparently withheld given the non-meeting held by the National Development and Reform Commission (NDRC) after the holidays. What has been offered will help China achieve 5% gross domestic product (GDP) growth this year, hardly a lofty