China's new stimulus package: finally, the turning point?

Whilst markets have all but lost patience when it comes to the China recovery, the measures announced by China’s Central Bank last week are the most comprehensive stimulus policy actions undertaken in recent years in terms of scale and urgency and are likely to provide meaningful stock market support.

The measures are a combination of monetary and fiscal support that will include funding from ultra long term and special sovereign bonds.

This was confirmed at an out-of-cycle economic Politburo meeting, usually reserved for exceptional circumstances, the last of which was held in March 2020 at the peak of Covid-19 concerns.

The direction of such fiscal spending is yet to be detailed but the strongest indication are that it is to be spent on initiatives to drive consumption, along with a capital injection into the banking system of around RMB1 trillion.

Managed Fund

Antipodes Global Fund – Long

Global Shares

View

ETF

Antipodes Global Shares (Quoted Managed Fund) (AGX1)

Global Shares

View

Key stimulus policy measures:

• A 30-basis point cut in the 1-year medium-term lending facility rate (from 2.60% to 2.30%).
• A 20-basis point cut in the 7-day reverse repo rate (from 1.90% to 1.70%).
• Reserve requirement ratio (RRR) cut by 50bps which frees up ~$142bn USD of liquidity.
• Lower mortgage rates for existing loans
• Down payment ratio for second homes cut to 15% from 25%.
• PBOC directive allowing financial institutions to borrow for stock investments - 500bn RMB facility.
• PBOC providing subsidised funds to be used for share buybacks and purchases by controlling shareholders - 300bn RMB facility
• Funding for such initiatives can grow if there is evidence they are working.

Key areas in which these measures will likely have meaningful impacts

The property and consumer sector could benefit from a reduction in mortgage rates and down payment ratios could increase housing market activity, stabilise pricing and general consumption. In financial markets, measures aimed at providing stock market support, in addition to recent reform (including the promotion of share buybacks) could help stabilise markets and attract value orientated investors. And finally, corporate liquidity is another area to watch. By increasing liquidity into the system, the PBOC wants to encourage further lending and flows into risk/growth assets.

While the Chinese economy is not yet out of the woods, the range of outcomes are converging towards larger stimulus and a return to growth/inflation or at least addressing the issue of deflation in the next year. Such an improvement in the economy is not priced in equities that remain compelling on mid cycle earnings assumptions.

Based on the next 12 months consensus earnings, MSCI China remains at the bottom of its historical valuation range at 10.2x next 12 months PE.

Investment opportunities 

Against this backdrop, we continue to see three broad buckets of opportunity for investors:

1. Attractively priced cyclicals that have consumer and property exposure. Opportunities include Alibaba and KE Holdings (the largest property portal in China, with a disproportionate share of secondary transactions, where sales are inflecting).
2. Defensive businesses such as China Mengniu Dairy and Tsingtao Brewery (second largest beer company operating in a consolidated market).
3. Structural growth opportunities around advertising and AI adoption, localisation, and decarbonisation. Nari Technology is a stock to watch with the company’s modern grid equipment and technology solutions in high demand as renewables and complementary build-out in ultra-high voltage infrastructure grows).

Build exposure to China and Emerging Markets with Antipodes

Antipodes Partners is an award-winning investment manager with over $10 billion in AUM and a dedicated emerging markets investment team managing over $2 billion invested across the asset class. 

Keep up to date with Antipodes' insights on LinkedIn. Or subscribe to receive news and insights via email on the Antipodes website.