Here’s Everything You Need to Know About China’s Stimulus

China has recently initiated its first significant coordinated monetary easing in several years, which entails reductions in the reserve requirement ratio (RRR) and interest rates, as well as revisions to property-related policies, including cuts to mortgage rates and adjustments to down-payment requirements.

Additionally, measures aimed at enhancing stock market liquidity, such as swap and relending facilities, are being implemented alongside steps to improve bank capitalization.

Looking forward, analysts from Bank of America anticipate that the emphasis will increasingly shift towards fiscal stimulus in tandem with monetary strategies to stimulate demand. This approach aims to boost consumption and investment, stabilize the property sector, and tackle balance sheet challenges.

Key areas of focus for the consumer sector include social security, healthcare, and pro-natalist policies, such as financial supports for families with multiple children and those with low incomes. While discussions around consumption coupons are ongoing, extensive nationwide distribution is not expected in the near term.

Bank of America notes that the current consumer downturn is the most severe since China joined the World Trade Organization. This has been exacerbated by an estimated RMB60 trillion (approximately US$8.6 trillion) in wealth erosion within the property sector since 2021. Other factors contributing to this downturn include historically low consumer confidence, weak business sentiment, stagnating job markets, wage stability issues, deleveraging, and an aging population.

According to BofA analysts, the most immediate impact of China’s measures will be seen through a wealth effect, particularly with the rally in the A-share market, which has increased market capitalization by RMB17.3 trillion as of September 23. This is expected to provide short-term support to market sentiment and expectations.

Nonetheless, the analysts warn that an immediate significant increase in overall consumption is unlikely, with the exception of previously announced trade-in subsidies in specific segments.

Regarding the timeline for a full recovery in consumption, the analysts indicate that it will take time and be contingent on the effectiveness of the implemented policies. Historical patterns suggest that major consumer downturns typically last between 3.5 to 4 years, and the current downturn is only 2.5 years in.

The analysts emphasize the necessity for decisive policies to address the substantial wealth destruction and property upheaval that have occurred. They believe a considerable effort is required to rebuild confidence and expectations, particularly in light of frequent internal policy shifts and external geopolitical developments. Otherwise, there is a risk that the current recovery efforts may be perceived as another false dawn.

In terms of global brand implications, analysts suggest that these brands may initially benefit from China’s recovery, with share price increases and a potential wealth effect enhancing consumer confidence, especially in the luxury and beauty sectors. However, expecting a rapid turnaround may be premature.

Domestic brands could be favored by policies, making them more appealing to lower-end consumers. Moreover, global brands are likely to face increasing competition from local players and must adapt with appropriate products, pricing strategies, and agility to navigate market disruptions for long-term success.