Next Week's Chinese Stimulus a "Watershed Moment"

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Next week will be a big one for all assets with exposure to China's economy as a significant stimulus is expected from the government.

If the government does enough, assets such as raw commodities and the Australian and New Zealand Dollar will continue to rise.

"The east wind is here," says Alex Loo, FX and Macro Strategist at TD Securities. "China's leaders are committed to spur a turnaround in consumer sentiment and the growth outlook."

TD Securities expects the Ministry of Finance to announce a new fiscal package next week of CNY4TRN (US$569BN) with a heavy focus on the consumer, equivalent to 3.2% of GDP, to complement the aggressive monetary easing.

This follows news reports last week that China will issue 1 trillion yuan of special bonds mainly to stimulate consumption sources. The reports came as authorities announced a set of monetary stimulus measures, largely in the form of interest rate cuts and capital requirement ratio reductions, to bolster the economy.

Some commentators said the efforts were more akin to a sugar rush than a 'bazooka', and most said for any stimulus to be truly effectice the monetary efforts must be accompanied by fiscal efforts.

"Our initial misgivings from PBoC's actions on Tuesday were best summarized by this famous Chinese proverb, "Everything is Ready Except The East Wind (万事俱备,只欠东风)", which implies that fiscal stimulus is the missing piece of the puzzle if authorities want to reverse China's economic fortune," says Loo.

TD Securities thinks the stimulus rollout is a watershed moment for the Chinese economy, looking for an asset price recovery and aggressive monetary stimulus to lift GDP growth for 2024 to 4.9% (prior: 4.7%).

This is a modest boost, considering there is only one quarter left in 2024 and most of the fiscal funds won't be disbursed in time.

For 2025, however, the full impact of the fiscal stimulus and greater monetary stimulus should filter through and anchor growth in the 5% region.

The New Zealand and Australian Dollars - as well as Asia and emerging market names - are the two currencies that have benefited from China's stimulus efforts and look set to retain support in the event of a major fiscal stimulus.

In the recent past, China-focused assets have shown disappointment with previous attempts to stimulate the economy.

But TD Securities says "this time is different" for the following reasons:

What's different this time for the economic outlook are the following:

A strong policy pledge on this scale didn't even happen, even when China faced 3% growth in 2022 (due to COVID lockdowns) and when the economy hit road bumps last year.

This looks to be a consumer-focused stimulus strategy, tracking closely to the promise from the Third Plenum to re-balance the economy more towards services.

The stimulus intends to bolster efforts to tackle the underlying structural issues that are hurting the consumer. Authorities are tipped to launch employment support with likely incoming supply-side measures to clear up excess housing stock.

The consumer-focused nature of these stimulus efforts is where the significance lies.

"If successful, a normalisation of China's high savings rate could trigger large consumption gains and bigger economic multiplier effects," explains Loo.