Why China’s Move is ‘A Game Changer’

China’s recent stimulus measures are being hailed as a potential turning point for its struggling economy, according to UBS.

As economic momentum wanes and deflationary pressures rise, China’s leadership has committed to “necessary fiscal spending” and implemented stronger-than-expected monetary stimulus aimed at stabilizing the property market and stimulating growth.

UBS analysts see this as a significant policy shift, noting that the recent interest rate cuts were more aggressive than anticipated, representing the most considerable easing since 2012.

In addition to monetary measures, UBS anticipates further interventions in the property sector along with fiscal incentives designed to enhance long-term demand, specifically in affordable housing and social welfare improvements.

Following the announcement of these measures, investor sentiment has skyrocketed, with the CSI 300 and other indices rising 14.5% and 13.5%, respectively. UBS predicts additional upside potential, estimating that the broader market could experience another high-single-digit percentage increase.

The bank states, “We think this policy shift could be a game changer for Chinese risk assets, but this is contingent on both execution and continuation.” They believe the market could rise again by a similar percentage after the significant gains seen since the stimulus was announced. However, the successful execution of these plans will be crucial.

A noteworthy element of the stimulus package is its emphasis on capital markets. UBS pointed out a CNY 500 billion swap facility announced to provide liquidity for brokers, funds, and insurance companies looking to buy stocks, with the possibility of further support rounds. The introduction of a special refinancing facility and discussions about a stock market stabilization fund highlight the government’s commitment to fostering market confidence.

UBS maintains an optimistic outlook on the growth potential for major Chinese internet companies, state-owned enterprises in high-dividend sectors, and industries related to structural trends like artificial intelligence. However, they caution that potential risks from external factors, such as the upcoming U.S. election, could impact these prospects.