Big Fireworks From China

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I can’t help utilizing the recent bouts of Chinese economic stimuli to one of that country’s most notable inventions. Gunpowder and fireworks were both invented in China, so it only seems fitting to think about the efforts to bolster that country’s economy and markets in those terms. Chinese authorities unleashed a blitz of stimulus measures on their economy this week. Most were monetary.These included:

This barrage makes the Fed’s recent 50bp cut seem a bit pedestrian, no?Unsurprisingly, mainland China’s benchmark index had its best week in 16 years, as the CSI 300 rose by 15.7%. If the Chinese authorities wanted “shock and awe”, they succeeded. And that should be a good thing for the global economy. It is important to remember the situation the last time that the Chinese market soared this much.In 2008, the Global Financial Crisis (“GFC”) was punishing a wide range of economies and markets.China was among the fastest to recover, and the Chinese economic expansion that ensued in the 2010’s helped bring the world out of its funk.It was therefore concerning that China appeared to be getting mired in malaise.If its positive influence was such that it could bolster the global economy over a decade ago, its negative influence could be a sufficient drag in the coming years. That would be bad for most investments, which is why, politics aside, investors should be favoring China’s measures.Yet the responses have varied. European shares pushed, with the recently forlorn luxury sector showing a rebound.It is unlikely that those companies were an intended beneficiary of the Politburo’s activities, but a more robust Chinese consumer can’t hurt them.Here in the US, stocks have generally moved higher, but not particularly robustly.We seem to be digesting our most recent rate cut and more consumed with pondering the next.Paradoxically, if one has been buying stocks on the hope that more aggressive cuts are coming, a stronger global economy doesn’t help – at least in the short-term.Even commodities were mixed.Copper prices are up about 6% this week, but oil is down by a similar percentage.Tensions in the Middle East, or the current pause in escalation, have much to do with those moves, but a uniformly stronger Chinese economy should bolster demand for a wide range of commodities.Perhaps the muted responses belie a nagging concern: are things really that bad in China that such a dramatic orchestrated response was required?The measures aimed at bolstering the flagging real estate sector, such as a drop in the down payment for second homes, seem to be a sign that things might be truly dire for homeowners and landlords.As we learned the hard way during the GFC, a downward spiral in real estate, which is typically purchased using borrowed money, can result in nasty deflationary effects that can spread unpredictably.It is encouraging that the Chinese authorities are undertaking bold measures to hopefully stave off a metastasizing crisis – particularly in an equity-market friendly manner – but we won’t know if those measures will ultimately bring success.More By This Author:Re-Checking Some Key Market ChartsTriple-Witch Says, “Remember Me?”I Can’t Fight This Feeling