The exchange … with Prescient China’s Tian Pan

Is China’s stimulus package a bazooka or a toy pistol?
5 mins read

September was a bonanza for punters in Chinese stocks – thanks to promises of a whatever-it-takes stimulus package by the Chinese authorities. Only, perhaps, the bazooka won’t be nearly as big as investors had hoped. 

Tian Pan, Prescient China’s head of strategy and product. Image supplied.

Last week there seemed to be huge disappointment with what China’s government is offering as a stimulus package to jolt growth, after a Tuesday press conference hosted by the National Development and Reform Commission. It had an instant dampening effect on Chinese stocks. What happened? 

TP: First, JP Morgan came out with a ¥2-trillion figure, then Citibank came out with ¥3-trillion, and none of these numbers were denied by the officials here. The way it typically works in China is that there are side channels from government departments where they pass on rumours to the bigger players so that they can manage expectations. We also have reasonable expectation that a ¥1-trillion stimulus would be the absolute minimum, but the reality is also that the financial regulators have said the markets have rallied too much and too quickly. So Prescient’s take on the press conference is that their intention was to cool the rally a little and not let it get out of control; like having a huge 100% rally and then a drawdown of 50%. But the way they executed it was very disappointing. They’re not very good at PR.  

We often blithely talk about ‘stimulus’ but what exactly is being offered here? 

TP: We’ve obviously had confirmed steps on the monetary side from the central bank. One of the key things for investors in South Africa is that when the South African Reserve Bank cuts repo rates, all our home loans automatically get cut. In China it doesn’t happen like that – the central bank cuts rates but commercial banks keep the high rates that you pay.  

[What was offered] was a sentiment lifter. One of the significant measures was the 50-basis point cut in home-loan payments for everyone, and that brings in about ¥150bn annually of additional disposable income for the public. 

Where we’ve seen a more direct approach is through consumption vouchers; even throughout Covid, every week or two the government would release vouchers [worth] ¥50 to ¥200 [R120-R500]. (Not everyone got them, and you had to enter a lottery, but you had a 60% chance.) It wasn’t a lot and nowhere near what the US Federal Reserve could do – no-one has the amount of money and capability as the Fed in terms of handing out cash. But this time in Shanghai specifically we are seeing consumption vouchers worth up to ¥2,000. All of these vouchers, by the way, are not cash – you have to buy something from JD or Alibaba.  

I think on the monetary side the other big issue was a ¥300bn fund for local governments to buy up unsold property, to stabilise the property sector. But we have zero expectations of the property sector rallying; I think in spite of everything directed at it there’s going to be a managed decline.  

And the last (measure) was an ¥800bn funding facility that was split between ¥500bn of swap funding and ¥300bn of low-interest funding to listed companies for share buybacks. The quantum sounds big, but to give you an idea, the daily trading volume [on the market] last week was ¥3.5-trillion – a record high. A normal day would bring about ¥1-trillion of trading volume. But what we like about what the central bank governor said is that if this ¥800bn works well, there could be a “round two and round three” and he didn’t stop – so it could be unlimited as long as it’s beneficial. 

But that just helps prop up the stock market – not main street? 

TP: Absolutely. We need the real street boost, which is why guys were disappointed with the Tuesday press conference. Out of the ¥2-trillion to ¥3-trillion rumoured, ¥1-trillion was earmarked for consumption vouchers for the poor. There are hundreds of millions of Chinese earning less than ¥1,000 per month. So it doesn’t take a lot to lift consumer sentiment for the bottom 500-million Chinese. 

Are punters in resources stocks getting ahead of themselves in expectations that stimulus equals demand for resources? Especially if the property sector – i.e. infrastructure development – is still in such trouble? 

TP: If you look at property, we don’t expect Chinese demand for steel and iron ore and cement to be constantly growing over the next couple of decades. Coal will remain big but there’ll be nothing like a J-curve growth. China is investing heavily into renewables and heavily into nuclear. You could say that certain companies with high exposure to uranium could do well; green energy, lithium, rare earth minerals, wood chips, etc. China is actively moving to stimulate more of a consumption-weighted company than an investment-weighted one. 

In 2015, the Chinese stock market collapsed, spectacularly, after a wild rally. Do you think we’re at risk of a similar surge and slump? 

TP: Absolutely – in terms of risk. But in terms of the probability of it occurring again I think it would be a lot lower – because policymakers are actively intervening. Tuesday’s press conference was a prime example. We’re pretty certain the intention was to cool off the market rally; the execution was just terrible.  

Our understanding of what the policymakers in China are trying to do this time is to improve the emotional wealth effect. In China, household wealth is on average 70%-80% in property and that’s paper wealth. And with property prices slumping, that emotional wealth impact makes people less willing to spend.  

In China historically, and even today because of capital controls and a less developed financial market, in essence you can only invest in three things: properties, stocks, and deposits or government bonds. So properties are going down, stocks have been down for three and a half years and bonds have gone up in capital value but the yield has continued to drop.  

The retail factor in China is massive – it drove the boom and bust in 2008 and 2015; the guys go all in and all out. Even the institutional investors in our view trade with a retail mentality compared to those in South Africa. So the easiest way for the government [to help] is for a slow steady growing stock market to offset the declining wealth impact of the property market – but it will not happen if the market goes up 100% and down 50% and the retail guys go in when it’s already up 80%.  

There has been plenty of debate about China’s investability over the past few years. Do you think the issues that made people nervous have been addressed? 

TP: I think those issues are behind us. Similar with Covid, the government realised that they did too much in too short a time span. The key event for us was at the end of 2023 when some government official published draft gaming regulations, almost reminding the market that tech regulations were back again. But then the official got quietly sacked and the draft regulations got removed from the official state website.  

The new premier, Li Qiang, who is second in charge to Xi Jinping, was the Zhejiang provincial chief and he literally hand-held and supported Alibaba from start-up stage to where it is now. He is known as pro-business, and when Xi was not in central government but running provincial governments, in Fujian, he was known to be pro-business – that’s how he rose to power.  

So it’s frustrating that a lot of the media puts a negative spin on Xi’s autocratic rule, but within the Chinese structure both Xi and Li are probably some of the most pro-business people that you will get. Look at what’s happening in the US now where they’re talking about breaking up Google. Maybe it’s time for the American tech companies to get regulated. China may just have started too early. In terms of general investability, I always say to our clients: keep your eggs in both baskets – who knows who is going to win this geopolitical fight in the next 10 years.

Giulietta Talevi

A prominent voice in print and broadcast financial journalism with a sharp edge in market and company news. Former Financial Mail Money editor and BusinessDayTV anchor, Giulietta boasts an influential digital footprint that commands industry respect.

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