China’s recent announcement of new support measures to boost domestic growth amid a property downturn has had a significant impact on investment trusts like Baillie Gifford China Growth (BGCG), Fidelity China Special Situations (FCSS), and JPMorgan China Growth & Income (JCGI). These trusts saw an average share price increase of 17 percent over five trading days, accompanied by a surge in trading volumes.
While these gains are impressive, investors should exercise caution when considering increasing their exposure to the region based on these measures. Previous interventions have had short-lived effects, and it remains to be seen whether this round of stimulus will have a more lasting impact. The MSCI China index experienced a 19 percent jump following the announcement, but the reasons behind this response are not immediately clear.
The challenges facing China’s economy, particularly in the property sector, are significant. Unfinished housing projects are still a common sight in Chinese cities, and the country’s regional banks are burdened with debt. The aftermath of the 2021 Evergrande default continues to weigh on the economy, and the central bank is facing pressure to stimulate demand and address concerns over home deliveries.
In response, the People’s Bank of China has announced measures such as lowering the minimum downpayment ratio for second homes and aligning existing mortgage rates with new ones. While these steps may provide some relief, they are unlikely to address the root causes of the property market’s imbalances, which stem from excessive speculation rather than regular supply and demand dynamics.
The central bank’s actions were well-received by the market, with stocks in China and Hong Kong rallying in response. Luxury goods companies like Burberry and Watches of Switzerland also saw significant gains, reflecting optimism about a potential recovery in China’s economic prospects. However, the outlook for emerging markets and the luxury goods sector is also influenced by factors like US dollar fluctuations and global trade tensions.
It remains to be seen whether the positive market reaction to the stimulus measures will translate into sustained economic growth. President Xi Jinping has tempered expectations about meeting annual growth targets, highlighting the challenges facing China’s economy. While the recent measures may provide some relief, they may not be enough to offset the ongoing credit slump and investment downturn.
Overall, the impact of China’s stimulus measures on the economy and financial markets remains uncertain. Investors should closely monitor developments in the region and take a cautious approach when considering their investment strategies.