Global Economy & Markets, Weekly Roundup 30/09/24
China’s substantial stimulus measures aim to safeguard the real GDP growth target of +5%
Chinese authorities announced a slew of measures to support economic activity with major stock indices surging (CSI300: +15.7% wow | MSCI China: +16.8% wow).
At the same time, weak euro area inflation data from individual member states increased the likelihood for an October ECB cut, with President Lagarde signaling growing confidence in disinflation at the Hearing of the Committee on Economic and Monetary Affairs (EP). Note that German sovereign bond yields declined by circa 10 bps in the past week (10-Year Bund: 2.12%) with periphery bond spreads narrowing further (GGB 10-Year: 96 bps).
On the other hand, US Treasury yields were broadly flat in the past week, edging slightly higher on Monday (10-Year: 3.80%), as Chair Powell indicated that if the US economy performs as expected, that would mean two more interest rate cuts this year for a total of 50 bps. Note that significant upward revisions took place for the personal savings rate suggesting a larger savings stockpile than previously thought.
Regarding China, monetary, credit and fiscal measures will focus on supporting private consumption, real estate, and the stock market. The central bank (PBoC) reduced policy rates by 20 to 30 bps (7-day repurchase agreements to 1.5% from 1.7% and 1-year medium-term lending facility to 2% from 2.3%).
Moreover, the reserve requirement ratio (RRR) of financial institutions was cut by -50 bps to 9.5% for large institutions, with the PBoC citing that another reduction of -0.25% or -0.50% could come by end-2024. The latest RRR cut is set to free up to CNY 1 trillion ($142 billion) or 0.8% of GDP for loan generation, according to the PBoC. Recall that overall credit annual growth, as measured by Aggregate Financing to the Real Economy (AFRE), was +8.1% in August, the lowest since 2003.
Spurring loan demand is probably the key challenge for a reinvigoration of lending growth. In that context, the PBoC announced its intention to see mortgage interest rates falling by -50 bps on average (the 5-year Loan Prime Rate which is used as a respective reference, is set to be utilized, alongside Authorities’ guidance towards commercial Banks), with specifics to follow. In addition, the downpayment for the acquisition of 2-hand homes will be reduced to 15% of total value, from 25%. Authorities signaled further measures to support the real estate sector.
In the fiscal front, reportedly (official announcements are pending), the Chinese central government will issue “special” bonds of CNY 2tn ($284bn) or 1.6% of GDP. Half of the proceeds are to be channeled towards programs to support private consumption and half towards financial support for local governments (possibly for debt refinancing).
Finally, a CNY 800bn package ($114 bn) to support the stock market was announced, consisting of: i) a CNY 500bn swap programme aiming at funding stock purchases by securities, funds and insurance companies and; ii) a CNY 300 bn lending facility towards banks, with the latter being guided to, in turn, lend listed companies and major shareholders in order for them to finance stock buybacks and share purchases, respectively.
Chinese authorities announced a slew of measures to support economic activity with major stock indices surging (CSI300: +15.7% wow | MSCI China: +16.8% wow).
At the same time, weak euro area inflation data from individual member states increased the likelihood for an October ECB cut, with President Lagarde signaling growing confidence in disinflation at the Hearing of the Committee on Economic and Monetary Affairs (EP). Note that German sovereign bond yields declined by circa 10 bps in the past week (10-Year Bund: 2.12%) with periphery bond spreads narrowing further (GGB 10-Year: 96 bps).
On the other hand, US Treasury yields were broadly flat in the past week, edging slightly higher on Monday (10-Year: 3.80%), as Chair Powell indicated that if the US economy performs as expected, that would mean two more interest rate cuts this year for a total of 50 bps. Note that significant upward revisions took place for the personal savings rate suggesting a larger savings stockpile than previously thought.
Regarding China, monetary, credit and fiscal measures will focus on supporting private consumption, real estate, and the stock market. The central bank (PBoC) reduced policy rates by 20 to 30 bps (7-day repurchase agreements to 1.5% from 1.7% and 1-year medium-term lending facility to 2% from 2.3%).
Moreover, the reserve requirement ratio (RRR) of financial institutions was cut by -50 bps to 9.5% for large institutions, with the PBoC citing that another reduction of -0.25% or -0.50% could come by end-2024. The latest RRR cut is set to free up to CNY 1 trillion ($142 billion) or 0.8% of GDP for loan generation, according to the PBoC. Recall that overall credit annual growth, as measured by Aggregate Financing to the Real Economy (AFRE), was +8.1% in August, the lowest since 2003.
Spurring loan demand is probably the key challenge for a reinvigoration of lending growth. In that context, the PBoC announced its intention to see mortgage interest rates falling by -50 bps on average (the 5-year Loan Prime Rate which is used as a respective reference, is set to be utilized, alongside Authorities’ guidance towards commercial Banks), with specifics to follow. In addition, the downpayment for the acquisition of 2-hand homes will be reduced to 15% of total value, from 25%. Authorities signaled further measures to support the real estate sector.
In the fiscal front, reportedly (official announcements are pending), the Chinese central government will issue “special” bonds of CNY 2tn ($284bn) or 1.6% of GDP. Half of the proceeds are to be channeled towards programs to support private consumption and half towards financial support for local governments (possibly for debt refinancing).
Finally, a CNY 800bn package ($114 bn) to support the stock market was announced, consisting of: i) a CNY 500bn swap programme aiming at funding stock purchases by securities, funds and insurance companies and; ii) a CNY 300 bn lending facility towards banks, with the latter being guided to, in turn, lend listed companies and major shareholders in order for them to finance stock buybacks and share purchases, respectively.