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China just announced its biggest economic stimulus package since the pandemic, impacting stocks and commodities around the world.
The country’s benchmark index CSI 300 (000300.SS) rose 4.3%, the most since July 2020, after details of financial stimulus and stock market support were announced by the People’s Bank of China on Tuesday. There was an increase in .
The country’s currency, the renminbi (CNH=X), fell 0.6%, its biggest decline since the collapse of the Japanese yen in early August.
In the U.S., stocks rose, but the biggest impact was on commodities. Silver futures (SI=F) soared more than 4.5% to their highest level in more than a decade. Copper futures (HG=F), which had already been falling for nine consecutive days, rose to a two-month high, marking a 10-game winning streak.
The stimulus package is China’s latest attempt to pull the economy out of recession caused by a volatile real estate market and deflationary pressures, and includes more than $325 billion in measures, most of which is rather than through financial channels.
For banks, the People’s Bank of China reduced the amount of funds required for lending (reserve reserve ratio) by 0.5 percentage points, securing short-term liquidity of about $142 billion.
The plan also lowers short- and medium-term interest rates and makes mortgage relief a top priority.
According to People’s Bank of China Governor Ban Gongsheng, these measures will benefit about 50 million households and save them $21.3 billion in interest annually.
A $71 billion stock market stabilization program that will give brokerages, funds and insurance companies access to capital to buy stocks through swap schemes in response to China’s struggling stock market (CSI is down 40% from its 2021 peak) was introduced.
But before investors start celebrating, it’s helpful to know that China has had a mixed or poor track record with these massive stimulus packages.
In 2008, the country’s huge infrastructure investments led to unsustainable debt. Fast forward to 2015, and despite similar interventions, the stock market crash wiped out the gains. And during the pandemic, China’s real estate sector collapsed after another stimulus package fueled a bubble.
The question on everyone’s mind: Will China add fiscal stimulus to its record?
China Resources facility under construction in Nanjing, Jiangsu Province, China, September 24, 2024. (Costfoto/NurPhoto via Getty Images) (NurPhoto via Getty Images)
If the Chinese government starts pouring more government money into this issue, especially infrastructure, there could be global ramifications.
Commodities will see another big rally, impacting everything from U.S. manufacturing to the energy sector. There could be significant changes in supply chains and raw material prices (yes, again).
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“It’s very unusual to have all these measures in place at once,” said Zhang Xu, Bloomberg’s chief Asia economist. “This speaks to the Chinese government’s sense of urgency to get the country back on track.” % (country growth) target. ”
And that urgency is why many are speculating that fiscal policy may be Beijing’s next move.
So what does this mean for US investors?
Rising commodity costs do not necessarily translate into consumer-level inflation. However, as China’s policies could push up commodity prices, harmful inflationary swings could be on the horizon, especially if Beijing continues to pull the levers. For U.S. businesses, this means higher input costs, unpredictable consumer demand, and planning headaches, especially for small businesses.
Macro Compass founder Alfonso Peccatiello said in a note to clients: We instead believe that inflation will become more volatile over the next decade. ”
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