GOOD NEWS BOOSTS INVESTMENT SENTIMENT
Credit expansion, at least in the short term, should have a positive effect on financial markets and the price of commodities as investors expect a boost in demand for goods and services. And, following the slew of new measures, this is exactly what we have seen.
China’s main stock index surged by more than 4 per cent within hours of the central bank’s announcement, enjoying its best single-day rally in 16 years. And this was followed by a more than 1 per cent increase in the benchmark price of oil. Sentiment has remained positive since then, with Chinese shares rising by approximately 20 per cent over the five days following the announcement.
Expansionary policies do, however, also come with risks. China’s property market has been in crisis since 2021 when the government introduced restrictions on the amount developers could borrow, leading many to default on their debts. Making large cuts to borrowing costs could reignite a boom in sales and values, creating a new property bubble.
But it could be a while before China’s property market starts to overheat. House prices in China are falling fast and there’s lots of spare inventory. Goldman Sachs estimated in April that the government may need to spend more than 15 trillion yuan to fix the problems plaguing the sector – far more than the recent stimulus blitz can provide on its own.
Predicting the outcome of the central bank’s new economic package in the long-term is challenging. It will probably be a year or two before we start noticing any real effects. But, at least in theory, the expansion of domestic credit that will be triggered by the central bank’s lending rate cut, as well as the associated banking stimulus, should spread to the wider economy.
This should reactivate
