Around a month ago, Chinese authorities unleashed a slew of stimulus measures to boost economic growth back up towards the 5% target, buoy the stock market, and stabilise the Chinese property market.
Measures included cuts to mortgage rates, lending rates, and unprecedented support for the stock market, as well as for homeowners. Further measures included initiatives to help China’s local governments, recapitalize large banks, and help buy millions of unsold apartments.
Just this week, China unveiled additional stimulus measures totaling $1.4 trillion as it scrambles to shore up its economy to counter any potential shock from Trump’s return to the White House.
China braces as Trump wins the election
Trump won the US presidential election, paving the way for his return to the White House in January of next year. Trump has been vocal about his plans to apply trade tariffs, with China in the firing line. Trump pledged to apply 60% tariffs on Chinese imports, suggesting the former President is keen to not only pick up his trade war where he left off but also up the stakes.
While China has deepened its ties with allies and boosted self-reliance on tech, the economy is more vulnerable than in 2016-20. With this in mind, China might be keen to avoid the strong reaction to Trump’s moves on tariffs seen in his first term.
China’s economy has been hit by a massive property crisis and struggles with unsustainable debt, highlighting its weaker position than eight years ago. The economy will likely struggle to reach 5% growth this year compared to a GDP of 6.7% during Trump’s previous stint in the White House.
Beijing’s latest stimulus measures have been directed at strengthening the heavily indebted local government. However, they fell short of offering additional support to consumers, which has disappointed the market.
How have the markets reacted?
Stock indices
The stock market reacted powerfully to the stimulus announcement a month ago, with increased volatility. Optimism initially sent stocks higher. Stocks in China and on the Hang Seng surged to multiyear highs.
The Hang Seng reached a high of 23,250 immediately following the stimulus announcement before easing back to current levels of 20,500. While this is notably off the highs, it is still up from 17,000, where it was trading ahead of the stimulus announcement.
Oil
Meanwhile, oil has seen a similar pattern, although the Chinese stimulus announcement came as tensions in the Middle East also ramped up, meaning it is hard to separate factors that drove the oil price higher. China is the world’s largest importer of oil, so when the economic outlook improves for China, oil prices can rise. When the outlook deteriorates, the oil demand outlook is also affected, pressuring the oil price.
Oil prices rallied from a low of $66 at the start of October to a peak of $78 just a week later. However, prices are now back at $70.00 a barrel as optimism about the Chinese stimulus programme faded and the risk premium on oil prices surrounding the conflict in the Middle East eased.
AUD/USD
In the forex market, the Australian dollar is considered a good proxy for China, given the high levels of trade it does with the country. Often, when the economic outlook for China improves, the Aussie dollar rises and vice versa.
AUD/USD has experienced choppy trade since Trump came to power, but at the time of writing, the pair is on track for a weekly gain, boosted by optimism of more stimulus from China. This optimism has overshadowed USD strength from the Trump trade.
Has China done enough?
The market’s response since early October suggests that while the stimulus announced is a move in the right direction, more measures may be needed to convince investors that China is back on track toward solid growth, particularly if Trump targets China with trade tariffs.
Trading economic events with PXBT
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