After the US Federal Reserve stole the limelight last week with their 50 basis points interest rate cut, it was the Chinese who were at the centre of attention this time. In an attempt to shore up confidence, they released a plethora of policy support measures as they look to revive economic activity and hopefully keep alive the chance of achieving 5% growth this year.

Whilst there were a number of measures introduced to improve liquidity within the system, perhaps the most telling were those announced regarding the property market. A change in policy means that the Peoples Bank of China (PBoC) will now cover 100% of loans in a program for local governments to buy unsold homes with cheap funding. This is up from a previous cover of 60%. A further announcement will see the repricing of existing mortgages, whereby they will be moved closer to new mortgage rates. This reportedly means that interest rates on some outstanding mortgages could fall by circa 0.5% and benefit around 50 million households.

The support for the property market will undoubtedly be with a view to improve consumer sentiment in the country. The measure, as compiled by the National Bureau of Statistics of China, is currently languishing at near the lowest reading going back to the early 1990’s. As a consequence retail sales growth, excluding the volatility seen during the pandemic episode, appears to have reverted to the downtrend which has been at play since circa 2012. This has not only impacted Chinese producers but also manufacturers from developed countries whose goods the quickly growing Chinese middle and upper class were keen to get their hands on, such as those offered by Moet Hennessy Louis Vuitton SE (more commonly known as LVMH).

Inflation is therefore not an issue in China and hasn’t been for some time. The most recent data shows a year on year growth rate of only 0.6% whilst core inflation, which excludes the more volatile items of food and energy, grows at only 0.3%. With producer prices and rents posting negative rates, it would seem that deflation rather than inflation remains the more prominent threat at present.

For now markets appear to like the changes implemented by the PBoC. By way of example, from its close on the 23rd September, before the announcement, the Hang Seng stock index was up over 13% by its close on the 27th. Whether these actions taken are enough to restore a more positive sentiment towards the economy, financial markets and within the Chinese consumer remains to be seen, but for now investors are making hay whilst the sun shines.

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