Share prices were pushed up throughout the region yesterday as investors anticipated that the plan, announced over the weekend, will lead to a pickup in Chinese demand for commodities and housing that will help pad the impact of a potential global recession. Particularly encouraging, economists say, is the large scale of the plan û although some of the spending was already planned and is merely being accelerated û and the fact that it not only focuses on infrastructure spending, but on income support as well.
European stock markets were also mostly in positive territory, but the enthusiasm wore off during US trading hours as commentators started to focus on the lag time before any of the Chinese measures will actually have a noticeable impact on economic growth and corporate earnings. They also honed in on the lack of details in the announced package. Neither of these issues had escaped their Asia-based colleagues, but for once investors in Asian chose to look at the positive part of the news, as opposed to the uncertainties still remaining û in itself a sign that the markets may be close to the bottom.
If the entire Rmb4 trillion is put to work, the total stimulus will amount to between 12% and 15% of GDP, according to economist estimates, and should help to partially offset the inevitable slowdown in exports. As a result, China may be able to continue to grow at a 7%-9% pace next year, supported not by the sale of goods to the US and Europe, but by a revival of consumption at home.
The government emphasised in its announcement that the fiscal stimulus should be rapidly implemented and to drum that home, it will invest Rmb100 billion in the current quarter.
Yu Song, an economist with Goldman Sachs, said in a written comment that the ôstrong toneö of the announcement is ôclearly a positive developmentö. ôWe believe it highlights the governmentÆs heightened concerns about the rapidly worsening economic environment in recent weeks and their willingness to take necessary measures to prevent the economy from slowing significantly in the coming quarters. It is a significantly positive development that the message of the government is now loud and clear.ö
Parallels were drawn to the Asian financial crisis in 1998 when China came up with a similar stimulus package for its domestic economy that allowed it the weather the worst of the storm. The fact that the package is significantly larger this time around (in 1998 it amounted to about 1.3% of GDP) is partly a reflection of ChinaÆs much larger economy, but should shows that the government is serious in its efforts to combat a hard landing of its hitherto fast-growing economy.
The commodities- and resources-heavy H-share index, which tracks Chinese state-owned enterprises listed in Hong Kong, led the gains yesterday with a 9.1% rally, but the domestic Chinese stockmarkets werenÆt far behind. The CSI 300 Index gained 7.4%, which lifted it above the multi-year lows where it has hovered for the past couple of weeks. However, the Chinese index is still the worst performer in the region this year with a 66% drop year-to-date.
Elsewhere in the region JapanÆs Nikkei 225 index jumped 5.8% and Hong KongÆs Hang Seng Index advanced 3.5%. Among the major exchanges, only Thailand and Taiwan failed to attract buying. The latter was perhaps a bit surprising since the central bank cut the Taiwan interest rate by another 25 basis points to 2.75% on Sunday, yet again taking action in between its regular meetings. However, investors appeared unconvinced that the easing will have much impact on the slowdown in global demand for Taiwan-made electronics and the dire export outlook was highlighted when Korea û also heavily dependent on exports - followed suit and trimmed its benchmark rate for the third time in less than a month. The 25 basis point cut left the seven-day repurchase rate at 4%.
The Korean stock market gained 1.6% yesterday, while Taiwan was largely flat with a 0.04% decline.
China outlined 10 measures to boost domestic demand: accelerate the build out of social safety networks, including support for low-end public housing; accelerate the build out of rural infrastructure, including safe drinking water and an upgrade to rural highways and power grids; accelerate the investment in railways, highways, airports and other large infrastructure projects; accelerated the development of the health care and education systems; strengthen environmental and ecological infrastructure development through waste water and garbage treatment and by fighting water pollution; encourage innovation and structural adjustment in the economy; accelerate the rebuilding of earthquake affected areas; boost rural income by, among other things, reducing the minimum purchase price of grain for next year and increase direct subsidies for farmers; a country-wide reform on corporate value added tax; and continue to ease credit to sustain economic growth.
¬ Haymarket Media Limited. All rights reserved.
