Chinese markets jump by 25% in the last week of September as Chinese Central Bank announced a stimulus package to boost its slowing economy.
A Bold Stimulus Package:
- The PBOC (China’s Central Bank) announced major stimulus measures to support their economy as they cut key benchmark rates by 0.50% and cash reserve requirements for banks.
- PBOC further reduced minimum down payment requirement for buying a second home from 25% to 15%, and increased funding support to state units for affordable housing.
- Further rate cuts and more fiscal support expected in next few months.
Need for Stimulus:
- The stimulus comes in wake of housing market slowdown in China and disappointing economic data that has led to expectation that China might miss its 5% GDP growth rate target.
- The Rate cuts at the same time also follow the bigger than usual Rate cuts announced by U.S Feds. Earlier, UK and European banks also cut rates.
- The stimulus also arrived just before 75thanniversary of People’s Republic.
Impact:
- The package is like the Chinese 4 Trillion Yen stimulus introduced by the Chinese government in 2008, which shielded China from the 2008 global financial crisis.
- The announcement was well received by the equity investors as the Chines indices jumped by over 25%.
- At the same time Indian stock markets faced heavy selling pressure and BSE went down by over 4% in a week as FIIs pulled out money.
- However, the Chinese rally is primarily driven by sentiments and it may miss the mark easily if the business sentiments do not improve.
- Lower mortgages may not mean that Individuals and corporations start borrowing in the weak credit markets. As after the housing market bust, Chinese households have stopped viewing the housing as a preferred asset class.
Current stimulus measures thus may not address Chinese economic problems and China will need to address structural issues in the economy to have a meaningful impact.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
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