China's New Property Stimulus to Affect Global Markets

How China's New Measures Could Impact Global Markets

by Faruk Imamovic
China's New Property Stimulus to Affect Global Markets
© Getty Images

In recent days, a significant development has come from China, where policymakers have introduced new measures aimed at revitalizing the beleaguered property sector. While these measures might seem modest compared to the sector's massive challenges, they signal a willingness to act that could see expansion if necessary. 

China's Property Stimulus: A Small Step with Big Implications

The property sector in China has been under considerable strain, with unsold homes and unused land piling up. In response, the Chinese government has unveiled a stimulus plan designed to address this issue. The core of this plan involves local governments and state-owned enterprises (SOEs) purchasing these unsold assets. Funding for these purchases will come from the People’s Bank of China (PBoC) and local government special bonds, with financing routed through commercial banks.

Larry Hu, an esteemed economist, notes that the size of this program—accounting for just 0.4% of China's GDP—is relatively small given the scale of the problem. However, the initiative sets a precedent, leaving the door open for further expansions if deemed necessary. Looking ahead, there is a strong likelihood of additional monetary easing in China, including a possible reduction in the required reserve ratio (RRR) within the next few weeks. This easing could be accompanied by government bond issuance aimed at bolstering the stimulus, potentially leading to interest rate cuts in June or early Q3.

For investors, this presents an interesting dynamic. Long-term bonds and yield curve steepeners could become attractive as bond issuance increases while short-term policy rates remain low. However, it's essential to approach investments in the Chinese yuan (CNY) with caution. The PBoC is likely to resist significant downward pressure on the USD/CNY exchange rate to keep China's exports competitive, making substantial gains in the CNY unlikely in the near term.

Opportunities Beyond China's Borders: Betting on Emerging Markets

While the direct impact on the CNY might be limited, investors can look to other emerging market (EM) currencies that stand to benefit from China's economic recovery. One such currency is the Chilean peso (CLP). Chile, a major exporter of copper, is poised to see improvements in its terms of trade as global commodity prices rise. This has not yet been fully reflected in the CLP's performance against the USD, presenting a potential opportunity for savvy investors.

The recent rally in global stock markets has been fueled in part by weak inflation and economic activity data from the United States, raising hopes that some developed market (DM) central banks might soon ease monetary policies. The European Central Bank (ECB) is expected to lead this shift in June, with the Bank of England (BoE) likely to follow.

Hong Kongs Cityscape
Hong Kongs Cityscape© Getty Images/Anthony Kwan

However, there are underlying challenges that could test this optimism. Structural supply-side constraints, such as those resulting from deglobalization, climate change initiatives, and geopolitical conflicts, pose significant threats to sustained economic growth and could drive long-term inflation higher. These constraints are doubly concerning as they could delay or dilute the impact of any monetary easing.

Geopolitical Risks and Their Market Implications

Recent geopolitical developments add another layer of complexity to the economic landscape. The death of Iran's president, Ebrahim Raisi, could lead to increased social unrest or regional conflicts, especially with a special election on the horizon. Additionally, the ongoing war between Russia and Ukraine remains a critical risk factor. Ukrainian President Volodymyr Zelensky has warned of potential escalations in the conflict, which could further destabilize global markets.

These geopolitical tensions underscore the fragility of the current economic recovery. Structural supply-side issues, such as disruptions from deglobalization and resource reallocation toward decarbonization, exacerbate these risks. Such challenges not only threaten growth but also contribute to long-term inflation, complicating the policy decisions of central banks.

In the United States, the Federal Reserve's recent communications have reflected a more cautious stance than initially anticipated. Speeches following Federal Reserve Chair Jay Powell's May 1 press conference have been less "dovish," suggesting a more restrained approach to future rate cuts. The upcoming Federal Open Market Committee (FOMC) minutes are expected to echo this cautious tone, highlighting the ongoing uncertainties facing the global economy.

The Road Ahead

Investors and policymakers alike must remain vigilant. The interplay between monetary policy, structural economic constraints, and geopolitical risks will continue to shape the economic landscape. While China's property stimulus is a positive step, its impact will depend on further policy actions and broader global economic conditions.

For those looking to capitalize on China's recovery, focusing on EM currencies like the CLP could offer significant rewards. However, it's crucial to balance these opportunities against the backdrop of potential risks. The coming weeks and months will be telling, as markets respond to policy shifts, geopolitical developments, and ongoing structural challenges.