Why China’s Stimulus Plan Matters to the World: 4 Key Insights

China’s Stimulus Plan: A New Economic Horizon

The stimulus plan announced by China on Tuesday, September 24, was highly anticipated both domestically and internationally.
The effects of these economic support measures are far-reaching.
Following the announcement of the most significant financial stimulus since the pandemic’s inception, assets exposed to China surged that very day.
European stocks, emerging market currencies, and commodities reacted positively to this news.
Even on Wednesday, September 25, the excitement remained palpable, with all Asian indices closing the session up by over 1%.

The Chinese yuan strengthened, reaching a new high not seen in 16 months, momentarily crossing the critical threshold of 7 yuan to the dollar in offshore trading.
Additionally, the People’s Bank of China followed up on its extensive policy easing with a cut in medium-term lending rates to banks on Wednesday.

Despite lingering doubts about the ability of the Chinese plan to positively impact consumption and the extremely weak credit demand from both businesses and consumers in the short term, Beijing’s shift appears significant for global markets and the overall economy.
Analysts from Reuters identify at least four reasons for this optimism.

1.
Revival of the Mining Sector

On Tuesday, mining stocks recorded the most substantial gains across Europe and Australia.
According to Gerry Fowler, head of European equity strategy at UBS, “Stimulus measures could bolster real estate markets more than broader consumption or industrial activity, explaining the outperformance of struggling mining stocks.” However, Fowler cautions that further evaluation over time will be necessary to determine if these measures can instill optimism within the private sector, as history often suggests fiscal measures are more effective than monetary ones.

An index tracking European mining stocks rose by 4.6%, marking its largest single-day gain in two years, while Australian mining stocks increased by 2.8%, their most significant daily spike in a year.
Both sectors have experienced significant pressure in recent months.

2.
Boost for European Luxury Goods

A robust Chinese economy supports the luxury consumption patterns in Europe, which heavily relies on demand from this major market.
Consequently, European luxury retailer stocks, which have been adversely affected by the weakening economic climate in the world’s second-largest economy, have seen fluctuating performance.
Year-to-date, a benchmark for European luxury shares is down 4.2%, in stark contrast to a 7.7% rise in the STOXX 600.

However, following the announcement of new measures, this benchmark surged by 3% on Tuesday, potentially setting the stage for its largest single-day gain since January.
Analysts from RBC note that companies such as Swatch Group, Burberry, and Richemont are most exposed to the Chinese market, with their stock prices rising between 2% and 5% on the same day.

3.
Stimulus for the German Economy

China ranks as Germany’s second-largest trading partner after the United States.
Many German companies have suffered due to dwindling demand for automobiles and machinery, compounded by rising competition from local Chinese rivals amidst a backdrop of an energy crisis exacerbated by the Russian invasion of Ukraine.

Should China’s new measures help stabilize the real estate market, Uwe Hohmann, equity strategist at Metzler Capital Markets, believes it would yield positive effects, particularly for the German chemical sector.
Major automotive players like Volkswagen and BMW are facing significant structural challenges due to local competition; thus, improved market stability could temper adverse impacts.

4.
Engine for Emerging Markets

Historically, China has been a growth engine for both nearby and distant emerging markets due to its substantial appetite for exports of commodities and oil during periods of expansion.
However, this time may unfold differently, according to experts.
“There’s still no significant fiscal stimulus directed at the anemic consumer, a key constraint,” highlighted Hasnain Malik from Tellimer.
“Thus, the package once again appears insufficient for a ‘bazooka’ stimulus that would reshape global demand for commodities.”

Nonetheless, Charu Chanana, a strategist at Saxo Markets in Singapore, explained that countries geographically closer to China, with strong trade ties, may enjoy certain advantages, alongside those holding national government bonds.
This stimulus follows a recent drastic rate cut from the U.S.
Federal Reserve, typically signaling a turning point for emerging economies.