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China just announced the biggest economic stimulus since the pandemic, impacting stocks and commodities globally.
After the People’s Bank of China (PBOC) announced details of monetary stimulus and support for the stock market on Tuesday, the national benchmark index, the CSI 300 (000300.SS), rose 4.3% – the biggest jump since July 2020.
The country’s currency, the renminbi (CNH=X), fell 0.6%, the biggest drop since the Japanese yen imploded in early August.
In the U.S., stocks rose, but the biggest impact was felt in commodities. Silver futures (SI=F) jumped more than 4.5% to a more than decade high. Copper futures (HG=F) — already on a nine-day tear — posted a tenth straight gain and rose to a two-month high.
The stimulus measures, China’s latest attempt to pull the economy out of a slump caused by a shaky housing market and deflationary pressures, include more than $325 billion worth of measures, largely implemented through monetary as opposed to fiscal channels.
For banks, the PBOC reduced the amount they had to set aside for lending – the reserve requirement – ​​by half a percentage point, freeing up about $142 billion in short-term liquidity.
The plan also lowers short- to medium-term interest rates and makes mortgage relief a top priority.
According to PBOC Governor Pan Gongsheng, these measures will benefit about 50 million households, saving them $21.3 billion in interest costs annually.
For the ailing Chinese stock market (the CSI has fallen 40% from its 2021 peak), a $71 billion stock market stabilization program was introduced. It gives securities firms, funds and insurers access to financing for share purchases via a swap facility.
But before investors start cheering, it’s worth noting that China’s track record with these big stimulus measures has been mixed to poor.
In 2008, the country’s massive infrastructure spending led to unsustainable debt. Fast forward to 2015, and a stock market crash wiped out gains despite similar interventions. And during the pandemic, China’s real estate sector collapsed after another stimulus effort fueled a bubble.
The question on everyone’s mind: Will China top this record with fiscal stimulus?
If Beijing pumps more government money into the problem, particularly for infrastructure, it could have global implications.
Commodities would likely see another major boost, impacting everything from U.S. manufacturing to the energy sector. There could be major shifts in commodity supply chains and prices (yes, again).
As Bloomberg’s chief Asia economist, Chang Shu, put it: “It’s highly unusual to implement all these measures at once.” He continued: “It’s a sign of the urgency in Beijing to stave off deflationary risks and get growth on track for 5% this year.” [national growth] goal.”
And that urgency is why many are speculating that fiscal policy is Beijing’s next move.
What does all this mean for US investors?
Inflated commodity costs do not necessarily reach consumer inflation levels. However, damaging swings in inflation could be on the horizon as China’s moves could push up commodity prices — especially if Beijing keeps its fingers crossed. For U.S. companies, that means higher input costs, unpredictable consumer demand and scheduling issues, especially for smaller companies.
In the words of Macro Compass founder Alfonso Peccatiello in a note to clients: “We do not risk a second wave of inflation. In fact, we expect more inflation volatility over the coming decade.”
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