Stocks up and dollar under pressure as Chinese stimulus gains politburo support

After four years of moribund growth and an economy struggling with a prolonged property slump, the Chinese central bank has announced a huge stimulus package directed at equity markets.

On Tuesday, the People’s Bank of China unveiled an Rmb800bn (US$114bn) war chest to boost the stock market by lending to asset managers, insurers and brokers to buy equities and to listed companies to buy back their stock.

The initial response was positive. China’s CSI 300 index — down more than 40% since 2021 — rose 4.3% for its best day since July 2020. On Wednesday it added 2.1% in a broad-based rally. The international response was more muted, however. While analysts welcomed the news, most were cautious in their optimism. In an op-ed, the editorial board of the Financial Times wrote:

“…Tuesday’s stimulus still fails to grapple with the reality of China’s economic challenge. Domestic demand is saddled by high precautionary saving rates and low confidence in the private sector. Beijing’s desire for export-led growth is also under pressure from the intensifying trade war with the US. The latest measures are poorly targeted for these problems, and may largely be a cosmetic effort to hit Beijing’s annual 5 per cent economic growth target.”

Maybe detecting the lukewarm response from the wider financial world, the Chinese Politburo, led by President Xi Jinping, took the unusual step of releasing a statement on Thursday morning promising the “necessary fiscal spending” to meet China’s growth target of 5%.

Most importantly, the official readout of the meeting promised more support for property developers and owners, with efforts to be made to “promote the real estate market to stop falling and stabilise.”

Today's reaction has been much more effusive, with Chinese property stocks up 15% and the STOXX Europe 600 up over 1% and closing in on an all-time high. Investors hope the Chinese stimulus can help ease the EU, especially Germany, out of the current downturn.

But what does the Chinese stimulus mean for the currency markets in the longer term?

While the USD has recovered over the last couple of days, we can expect the DXY to continue its months-long slide. An economically invigorated China will be a boon for emerging markets, and EM currencies are all already seeing a lift, with the South African Rand hitting 20-month highs against the USD. Likewise, the AUD/USD (seen as a proxy for the Chinese economy due to Australia’s close trading relationship with China) is up, trading near the July 2023 highs.

Monetary policy in the United States also needs to be included in the equation. With the Chair of the Federal Reserve, Jay Powell, and several Fed governors due to speak today, we may get a better idea of how quickly the Fed will lower interest rates. Investors are pricing in over a 50% chance that the US central bank will lower borrowing costs by another 50bps in November, even though several Fed officials this week tried to push back against market expectations. 

Overall, we can expect a weaker USD going into the autumn, though the EUR/USD will continue to struggle unless we see a real turnaround in the eurozone’s economic outlook.