After two years marked by frustrated expectations and frequent disappointments, many investors had stopped believing in a genuine stimulus plan from the Chinese government. Thus, it was with some surprise that, barely a week after the release of disappointing economic data for August, China announced an unprecedented series of measures, signaling the clearest signs of a recovery effort since the pandemic. This announcement shook the sleepy domestic Chinese stock market by surprise, which surged by 17% in one week, achieving its best performance since the 2008 financial crisis.
It all started last Tuesday when the People’s Bank of China unveiled its ambitious easing plan. This plan encompasses several components: monetary policy measures, such as interest rate cuts and reductions in banks’ reserve requirement ratios, a decrease in mortgage rates to support the real estate sector, and an unexpected mechanism facilitating financing for stock buybacks, providing direct and unprecedented support to the stock market. The scale and simultaneous nature of these measures underscore Beijing's urgency and determination to act swiftly.
Another factor that bolstered market optimism was the unconditional support message from the Chinese government during last Thursday's Politburo meeting. It unveiled additional promises, including capital injections into state-owned banks and direct cash handouts in certain provinces to stimulate consumption. These are the first measures of this scale since 2008, reflecting the magnitude of the challenges China is facing. While doubts may remain regarding the impact of these measures on the economy, particularly in the real estate sector, the authorities' determination to halt the deflationary spiral now seems unquestionable.
It is therefore conceivable that this rally, currently tactical in nature, may not lose steam like previous episodes, thanks to still-depressed valuations and lingering pessimism in this market. In the longer term, the transformation of this rally into a structural rebound will depend on the effectiveness of these monetary and fiscal measures on the real economy, as well as their ability to restore confidence among entrepreneurs, consumers, and investors after the accumulated damage of recent years.
The primary risk remains another false start. The failed attempts since 2022 have left deep scars. However, this time, a real shift in macroeconomic policy seems to be underway. The difference lies in the fact that the Chinese government appears to finally recognize the severity of the economic slowdown, with a renewed determination to restore confidence and change the narrative. The stakes have become too high to risk another disappointment in the markets. Additional measures may be announced in the coming weeks or months.
In the meantime, just as it is unwise to fight the Fed in the U.S. with its rate cuts, it would be equally imprudent to go against a Chinese central bank that appears equally determined to revive its economy.
Thomas Jordan bows out with an announcement that will please business leaders and property owners. Indeed, the SNB's reference rate has been lowered once again to 1%. His presidency will have been marked by several important innovations, including the introduction of a floor rate, negative interest rates, and the use of the SNB’s balance sheet to counter the appreciation of the Swiss franc. While he is praised for these landmark decisions made in a particularly challenging international context, his legacy is a Swiss franc that is undoubtedly too strong for the export industry. This will certainly be one of the priorities for his successor, Martin Schlegel. The franc is near record highs against the euro and the dollar, and room for maneuver is running out on Saron rates, with the SNB expected to lower them two more times in the coming months. However, while other central banks continue to cut their rates in 2025, the SNB will once again have to rely solely on foreign exchange intervention to prevent a further surge in the franc.
Despite tensions in the Middle East, the price of oil remains very low. To avoid excessive weakness, OPEC is focusing on ensuring compliance with production quotas among its members, as their discipline has not been exemplary.