China’s economic recovery – investors are missing the point

The out-of-cycle timing of the announcements and the coordination of monetary and fiscal incentives indicate that the central government is trying to get its way through by shouting “at any cost”. Still, it is unlikely that stimulus will be deployed like a bulletproof vest, as the government needs to manage risks and keep some gunpowder in reserve in case the external environment turns less favorable. The significant incentives will not be made public in the form of an NDRC statement anyway, so we probably have to wait patiently until the State Council and the Ministry of Finance announce further details.

The market is waiting with some doubt as to what exactly the stimulus will mean in terms of commodity market demand – on the one hand, whether it will be sufficient to deal with the stubborn structural problems of the Chinese economy – mainly affecting the real estate market and demography – and on the other hand, how much of an impact they will have to the goods market, these are significantly more consumer-oriented stimulus measures than the past real estate market reflation.

“We agree with some elements of skepticism – based on the aggressive rally of iron ore, it is not entirely clear whether the decision-makers were aware that the measures supporting the real estate market are structurally specifically aimed at the lower supply. We think it is more likely that the Chinese government will step up existing measures to modernize China’s machinery industry stock and equipment, and – most importantly – will double the parts of the existing stimulus package that are working – that is, it will focus on the transition economy.”

– adds István Al-Hilal, head of Central and Eastern Europe at Fidelity International.