Why China’s Action is ‘A Game Changer’

According to UBS, China’s recent stimulus measures could significantly impact the nation’s struggling economy.

With economic growth slowing and increasing deflationary pressures, China’s leadership has committed to “necessary fiscal spending” and implemented stronger-than-expected monetary policies to stabilize the property market and foster growth.

UBS analysts view this as a notable policy shift. They emphasized that this week’s interest rate cuts were more aggressive than anticipated, representing the most extensive easing since 2012.

In addition to monetary measures, UBS anticipates further interventions in the property sector and fiscal initiatives aimed at boosting long-term demand, particularly in affordable housing and social welfare enhancements.

Investor sentiment has improved since the announcement of these measures, with the CSI 300 and Hang Seng indices rising by 14.5% and 13.5%, respectively.

UBS believes there is further upside potential, estimating that the broader market could increase by an additional high-single-digit percentage. They stated, “This policy shift could be a game changer for Chinese risk assets, contingent on both execution and continuation.”

However, the effectiveness of the government’s implementation remains a concern.

A significant feature of the stimulus package is its focus on capital markets. UBS noted the introduction of a CNY 500 billion swap facility aimed at providing liquidity to brokers, funds, and insurance companies for stock purchases, with the possibility of further support measures.

The establishment of a special refinancing facility and discussions surrounding a stock market stabilization fund highlight the government’s dedication to enhancing market confidence.

UBS is optimistic about the growth potential for leading Chinese internet companies, state-owned enterprises in high-dividend sectors, and areas aligned with structural trends such as artificial intelligence. Nevertheless, they also pointed out potential risks from external factors, including the upcoming U.S. election.