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Offering fresh insights and analysis, our emerging markets professionals explore top-of-mind questions about investing across the asset class in our monthly Emerging Markets Monitor.

The new package stands out by introducing the promise of fiscal stimulus and offering greater breadth of financial support.

Until now, the government has focused on one-off regulatory and monetary policy changes such as cutting interest rates and lowering mortgage requirements in its efforts to spur growth. This time, the People’s Bank of China (PBOC) came out on 24 September with an array of policy changes, from cutting banks’ reserve requirements to reducing down payments on second homes.

Two days later, President Xi Jinping unexpectedly used China’s Politburo meeting to announce broader actions. The Politburo vowed to achieve the country’s annual economic goal of 5% GDP growth—a level that many economists and investors had already given up on for this year—with a combination of fiscal spending and measures to stabilize the real estate market. New equity market support was also unveiled, including a PBOC-backed RMB500 billion (about $70 billion) borrowing facility for non-bank financial companies and a relending program to support share buybacks.

The latest measures drove a big bounce in Chinese stocks, with the Hang Seng Index finishing up 4.1% on 26 September. The China Shenzhen Stock Exchange A-Share Index climbed 4.3% that day and more than 15% for the week, its best performance since 2008 when China announced a sizable stimulus package during the global financial crisis.

After the PBOC announced on 29 September that homeowners will be permitted to refinance their first mortgages, the rally continued and boosted the return on the MSCI China Index to 24% for September alone and almost 30% for the year so far.

China’s bond market had the opposite reaction initially: Prices fell on the expectation that fiscal stimulus would translate into more government debt issuance. However, strong domestic demand for China’s bonds this year had previously helped push yields to record lows, with the 10-year yield around 2% in late September, as the central bank cut rates, real estate prices continued to decline, and equity markets lagged.

Which way bonds go from here may depend on the details of the fiscal stimulus; even though bond supply is expected to rise, we believe demand is likely to stay strong amid weak credit growth.

We believe the impact of this package by itself on key areas of weakness in China—consumption and housing—is likely to be limited.

China’s policy approach overall has been tilted toward supporting investment (i.e., creating more supply) at a time of demand deficiency. The current household savings rate is still high at 36%,1 and consumers’ reluctance to spend has contributed to a deflationary environment.

More support for consumption will likely be needed to put the economy onto a sustainable path out of deflation. Shanghai’s announcement in late September of RMB500 million (more than $70 million) for consumer vouchers may be a step in the right direction, but sustaining consumer spending could require more significant changes from the Chinese government. Raising social security and healthcare support, for example, would ease the financial burdens that encourage saving. Incentives to purchase unsold housing inventory would further help the property sector.

The PBOC’s support facilities for the equity markets bode well, and the package has clearly boosted sentiment in China’s stock markets already. We also expect the stimulus to help the real estate and banking sectors.

We are encouraged by the new willingness of the government to engage in fiscal stimulus. It comes at a critical time. With exports less reliable as a source of growth due to trade tensions and expectations for slowing growth elsewhere, including the United States, boosting domestic consumption could help China get to its 5% growth target in 2025.

The announcements have provided few details on the fiscal stimulus, and more information is expected in the next few weeks. The timing of the package leaves room for the government to unveil more measures—fiscal and otherwise—before the end of the year. We will closely watch where the fiscal funds are directed and what the likely impact of any additional measures will be on the key areas of consumer spending and housing.

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Notes


1 Urban household savings as of September 2024, based on our analysis and data from China’s National Bureau of Statistics.

The performance quoted represents past performance.

Past performance does not guarantee future results.

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Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss.

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The MSCI Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of emerging markets country indices including: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

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The MSCI Emerging Markets (EM) Asia Index captures large and mid cap representation across 9 Emerging Markets countries. With 1,117 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets EMEA Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the emerging markets countries of Europe, the Middle East, and Africa.

The MSCI Emerging Markets Latin America Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the emerging markets countries of Latin America.

The MSCI Emerging Markets Growth Index measures the performance of companies in the broader MSCI Emerging Markets Index with higher EPS growth estimates over the short term and long term, internal growth rates, long-term historical EPS, and long-term sales growth rates.

The MSCI Emerging Markets Value Index measures the performance of companies in the broader MSCI Emerging Markets Index with lower price-to-book, lower price-to-forward-EPS ratios, and higher dividend yields.

The MSCI Emerging Markets Small Cap Index includes small cap representation across Emerging Markets countries.

The JP Morgan Emerging Markets Bond Index (EMBI Global Diversified) is a uniquely weighted version of the EMBI Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries eligible current face amounts of debt outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global.

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The JP Morgan Corporate Emerging Markets Bond Broad Diversified Index (CEMBI Broad Diversified) is a uniquely weighted version of the CEMBI. It comprises only US dollar–dominated emerging markets bonds. The countries represented in the CEMBI Broad Diversified are the same as those in the CEMBI.

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