China unveils $1.4 trillion debt package. How should we interpret this and its impact?

On November 8, Chinese government unveiled its latest fiscal plan. With the Chinese stock market experiencing a remarkable turnaround since September, there were high hopes for this meeting. Here’s a summary of the outcomes:

– Introduction of a $1.4 trillion (¥10 trillion) debt swap plan to resolve risks associated with local hidden debts.

– No specific amount for government bonds to strengthen bank capital.

– No clear plan for government bonds to rescue the property market.

– No mention of large-scale fiscal support for livelihoods and consumption.

Let’s take a closer look at the policies before discussing potential market moves forward.

Local government investment has historically fueled China's rapid economic growth but has also led to a substantial accumulation of high-interest hidden debt. Rising repayment pressures in recent years have forced local governments to reduce spending, hindering economic recovery.

The Ministry of Finance has revealed the total hidden debt: ¥1.43 trillion. In response, the government has launched a ¥10 trillion ($1.4 billion) debt swap plan.

This initiative is expected to save local governments about ¥600 billion in interest over five years, restore fiscal health, and alleviate issues like unpaid salaries and outstanding business payments.

The plan in general fell short of market expectations, which anticipated stronger fiscal measures for real estate and consumer spending. However, there’s no need for concern; the shift toward fiscal expansion is clear, and more initiatives will follow. The Finance Minister noted that policies to support state bank capital and the real estate market are in the works.

Concerns about the government's fiscal capacity are unwarranted for two reasons:

1. Lower Debt Levels: China’s government debt ratio is only 67.5%, significantly lower than the G20 average of 118.2%, according to IMF. This means there’s considerable room for fiscal deficits.

2. Effective Asset Creation: The existing debt has resulted in productive assets like transportation and energy infrastructure, supporting further borrowing.

Real estate and consumer stocks showed promise before the recent meeting, but the absence of expected policy support may lead to increased selling pressure in these sectors.

However, there's no need to fear a reversal of the Chinese bull market that began in September because this rally is driven by two key factors:

1. U.S. Rate Cuts: As the U.S. is entering a rate-cutting cycle, the undervalued Chinese assets are attracting global funds.

2. Government Commitment: The Chinese government is signaling a strong intent to stimulate the economy, boosting market confidence in recovery.

With these two key factors still in play, the momentum for Chinese stocks is unlikely to fade anytime soon.

1. Stay Calm: Expect short-term volatility but avoid overreacting.

2. Watch Policy Developments: Keep an eye on important upcoming meetings, especially the Central Economic Work Conference in December and the National People's Congress in March.

a. Target sectors benefiting from the debt swap plan, like infrastructure and urban investment.

b. Continue monitoring consumer and real estate sectors for future opportunities.

3. Focus on Select Stocks:

In summary, investors should remain rational and patient, which are key to navigating this challenging yet opportunity-filled market.