China's Stimulus Package: Don't Miss the Train (5-min read / free)

This is your chance to outperform the markets!

China on the Decline

China is an economy guided and decided by Chinese Communist Party (CCP). If the CCP decides the Chinese economy must grow by 5% this year, then that must happen by any means possible. Otherwise the central authority loses credibility.

And Xi Jinping does not mess with credibility.

In Q2 2024, China's GDP grew at 4.7 percent year-over-year. On quarterly basis, the country's Q2 economy expanded by 0.7 percent from the first quarter. On an annualized basis, that’s 2.8%.

That rung all the alarm bells and forced China to deliver a stimulus package long not seen, perhaps only rivaled by the early pandemic days. That’s a clear message for the people who felt the Chinese government was letting its economy go down (Xi Jinping has the worst growth rates average of all Chinese presidents from the past decades).

China is currently swamped in a real estate bubble pop, suffering from deflationary pressures, its youth faces widespread unemployment rates and local authorities’ debt levels are ballooning. Here is how the country is hoping to turn around the situation.

Xi Jinping (ABC News)

Key Measures

Here are the key measures of the enormous stimulus package (remember 10 yuan = USD 1.4):

• The People’s Bank of China (PBOC, the Chinese central bank) changed its interest rate from 1.7% to 1.5%. Usually it cuts in 10 bps, that’s a double cut at once which is unusual for the PBOC;

• Existing mortgage rates reduced by 50 bps on average;

• 50 bps cut to the RRR – the amount of cash that commercial banks must hold as reserves;

• Down-payment ratio on second-home reduced from 25% to 15%;

• The 300 billion yuan fund that was set up in May to encourage local governments to buy up unsold homes and convert them into subsidised housing was 60% funded by the central bank: now it’s 100%;

• Structural monetary policy facility of 500 billion yuan would be established to allow security houses, fund-management firms and insurance companies to tap liquidity when purchasing stocks via a swap line of pledging their assets for high-quality assets;

• Relending facility of 300 billion yuan, with an interest rate of 1.75%, established to guide banks to support listed companies’ stock buy-backs and purchases.

Wow. Let me catch my breath. Wait… we’ve got more. China announced later this week more measures, in particular the following new debt issuances:

• 1 trillion yuan ($140 bn) of special bonds mainly to stimulate consumption-sources

• Another 1 trillion yuan via special bonds to help local governments tackle debt problems-source

The Chinese government will do whatever it takes. “Whatever it takes” is usually music in investors’ ears.

China’s GDP growth rates (Statista)

This is What it Means for Chinese Stocks

Buy, buy, buy. Buy everything. Well, not everything. Buy quality Chinese stocks. Buy those companies that have been around a while and managed to grow through pandemic and economic slowdown. Consider those resilient companies like Alibabas and Pinduoduos and Xiaomis and BYDs of the world.

One of Warren Buffett's most famous quotes is: “Only when the tide goes out do you learn who has been swimming naked.”

That just happened. We saw who was swimming naked in China. The top companies that survived and strived, they will perform even better in a (much) easier environment.

Don’t go all-in China. Because probably without even knowing and without even owning Chinese stocks, you may already be heavily exposed to China’s economy.

A solid and lower risk way (in the long run) to gain exposure to China is to have following types of stocks in your portfolio:

• European car manufacturers: think MBG (Mercedes) and BMW which are very popular among Chinese consumers. They will use the cheaper debt to buy them.

• European luxury companies like LVMH and RMS.

• U.S. brands like Apple and Nike will enjoy increased liquidity of the Chinese consumer.

If you are a stock picker, this is your chance to outperform the market: increase your exposure to China. That’s what I did. You can check my portfolio for ideas:

Thank you for reading! I hope this was useful for you. 💚🙏

Etcaetera

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P.S.: I am forced to say it for compliance reasons but none of this is investment advice. It’s just what I do and think. Do your own research guys.