What China's biggest stimulus package since the pandemic means for US investors: Morning Brief

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China has just announced its biggest stimulus package since the pandemic, impacting stocks and commodities around the world.

After the People's Bank of China (PBOC) announced details of monetary stimulus and stock market support on Tuesday, the country's benchmark index, the CSI 300 (000300.SS), rose 4.3% – the biggest jump since July 2020.

The national currency, the renminbi (CNH=X), lost 0.6 percent – ​​the biggest drop since the collapse of the Japanese yen in early August.

In the US, stocks rose, but the biggest impact was felt in commodities. Silver futures (SI=F) jumped over 4.5%, hitting a more than 10-year high. Copper futures (HG=F) – already on a nine-day high – posted their 10th consecutive gain, climbing to a two-month high.

The stimulus package is China's latest attempt to pull its economy out of a crisis caused by a shaky real estate market and deflationary pressures. It includes more than $325 billion in measures, mostly through monetary – rather than fiscal – channels.

For banks, the PBoC lowered the reserve requirement ratio that must be set aside for loans by half a percentage point, freeing up around $142 billion in short-term liquidity.

The plan also lowers short- to medium-term interest rates and gives mortgage relief top priority.

According to PBOC Governor Pan Gongsheng, around 50 million households will benefit from these measures, saving $21.3 billion in interest expenses annually.

For China's ailing stock market (the CSI has fallen 40 percent since its 2021 peak), a $71 billion stock market stabilization program was introduced to allow securities firms, funds and insurers to access financing for stock purchases through a swap facility.

But before investors start celebrating, it is helpful to know that China's track record with these major economic stimulus programs is mixed to poor.

In 2008, the country's massive infrastructure spending led to unsustainable debt. And in 2015, despite similar measures, a stock market crash wiped out all gains. And during the pandemic, China's real estate sector collapsed after another stimulus package fueled a bubble.

The question on everyone’s mind: Will China top this record with fiscal stimulus?

If Beijing begins to address the problem with more government funding, especially for infrastructure, it could have global implications.

Commodities would likely see another major rally, impacting everything from U.S. manufacturing to the energy sector. There could be major shifts in supply chains and commodity pricing (yes, again).

The story continues

Chang Shu, chief Asia economist at Bloomberg, put it this way: “Implementing all these measures simultaneously is highly unusual.” He added that it “reflects the urgency Beijing feels to avert deflationary risks and put growth on track for this year's 5% target. [national growth] Goal.”

And this urgency is why many speculate that fiscal policy could be the next lever Beijing puts in motion.

So what does all this mean for US investors?

Inflated commodity costs do not necessarily match consumer inflation. Rock inflation could be looming as China's actions could drive up commodity prices – especially if Beijing continues to pull the trigger. For U.S. companies, this means higher input costs, unpredictable consumer demand and planning problems, especially for smaller companies.

In a note to clients, Macro Compass founder Alfonso Peccatiello put it this way: “We are not risking a second wave of inflation. Rather, we expect greater inflation fluctuations over the next decade.”

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