August 13, 2018
Audrey Kaplan, Head of Global Equity Strategy
Chinese Stimulus Could Support Global Growth
- The Chinese government has changed its policy tone to promote Chinese growth and stabilize the economy in the face of U.S.–China trade war tensions.
- China has the fiscal and monetary policy flexibility to support a gross domestic product (GDP) growth target of approximately 6.5%. We believe this should support continued Chinese corporate earnings growth, which would be beneficial for emerging-market (EM) equities.
What it May Mean for Investors
- Trade war rhetoric has dominated the summer season. Yet, we are watching for signs in China—and elsewhere in the emerging markets—that the trade conflict has discounted equity prices to a level at which the upside potential would warrant an upgrade of the EM equity class above our current neutral view.
China launches new stimulus program that could fuel continued global synchronized growth
In July, the People’s Bank of China (PBoC) and the Chinese State Council announced several positive measures to support domestic demand. These stimulus measures are policies intended to help China stabilize slowing infrastructure spending. The Chinese government particularly prizes stability and has injected spending and lending stimulus to stabilize its economy amid economic reforms since 2015. The stimulus measures directly support sectors of the economy adversely affected by tightening Chinese lending regulations earlier this year. The supports also act to offset concerns about a growth slowdown related to the trade dispute.
We have summarized some key highlights of China’s economic stimulus program below:
In late July, China announced greater coordination between fiscal and financial policy measures in an effort to boost domestic demand.
China also is implementing several monetary policy easing steps:
The PBoC will be easing liquidity conditions to help support funding for small businesses.
China is implementing targeted required reserve ratio cuts for banks. The third rate reduction was on June 24. The rate cut for the five largest state banks and 12 joint-stock banks frees 500 billion yuan ($73.3 billion) in liquidity.
The country’s fiscal policy announcements included:
Lower corporate tax rates: The Chinese State Council set a target of 1.1 trillion renminbi ($161 billion) in tax cuts (equal to just over 1% of GDP), in addition to 65 billion renminbi ($9.5 billion) in tax reductions tied to 2018 research spending. The 113 billion renminbi ($16.5 billion) in tax refunds for advanced manufacturing and the services industry also will be implemented by the end of September.
Local government funding: There will be special bond issuance and funding arrangements launched at the local government level. This means that local governments should be able to secure more funding in the remainder of 2018.
We expect the net result of these policy stimulus actions to be a resumption of Chinese economic growth in the autumn. We already are seeing signs of economic stabilization from the Chinese economic data releases as shown on Chart 1.
Economic growth often translates into corporate earnings per share (EPS) growth. The current consensus EPS estimates suggest that for 2019, the year-over-year MSCI China Index EPS growth will be 16.1%, and for 2020, it will be 14.6%.1 Both of these figures are above the current consensus Chinese EPS growth forecast of 13.3% for 2018 (Chart 2). While the U.S. is likely to see peak EPS growth this year, China and the rest of Asia are expected to see a continued earnings growth uptick.
We expect the Chinese government to succeed in stabilizing the country’s 2018 economic growth through tax cuts, greater infrastructure spending, and increased credit availability and liquidity for banks, businesses, and consumers. We are watching for any signs that Chinese growth and corporate earnings will improve in the future, once the new easing policy stance begins to stimulate the world’s second largest economy over the next 6 to 12 months.
China’s equity market is important for EM and global equities, as China’s equity market capitalization represented 31.2% of the MSCI Emerging Markets Index as of July month-end.2 Chinese equities have declined by 6.1% year to date (as measured by the MSCI China Index) on concern over the U.S.-Chinese trade conflict. Our analysis indicates that this sharp price decline has brought Chinese equity valuations to more compelling levels. We moved our EM equity rating from underweight to neutral in June, based partly on improved valuations. At this time, we retain our neutral rating. The Chinese stimulus is a positive, but uncertainties about the future of the U.S. trade disputes with various trading partners could continue to weigh on equity market sentiment. Our strong conviction is that additional tariffs and other punitive trade measures will be limited by the constraint that countries want to minimize self-imposed economic damage. While tariffs remain low and have limited application, the economic stimulus could counter negative tariff effects.