The China Factor

After the FOMC opened the door to a more aggressive easing path, policymakers in China followed suit with their own "bazooka" style stimulus ahead of the Golden Week holiday.?

On September 24, China's State Council hosted a press conference attended by key financial policymakers and regulators, including the governor of the People's Bank of China. At the event, they announced a number of aggressive easing measures, including:?

• Property Easing Measures: In addition to lower mortgage rates, the PBOC will lower the down payment ratio for second homes from 25% to 15%, which is the same level of first home purchases. They also indicated that they would lend banks additional funds to purchase land from developers.??
• Equity Market Support:?The PBOC is setting up a RMB 500 billion ($71 billion) facility for qualified market participants to purchase Chinese equities. Also, policymakers set up another facility for banks to support company share repurchases.?
• Policy Rate Cuts: This includes lowering existing mortgage rates by 50 bps, decreasing the 7-day reverse repo rate by 20 bps, and cutting the medium term lending facility rate by 30 bps.
• Required Reserve Ratio Decrease: The PBOC lowered the required reserve ratio (RRR) for banks by 50 basis points to 9.50% and gave strong guidance for an additional 25 bps to 50 bps cut by the end of the year. The RRR policy lever is often one of the highest profile monetary policy tools, and the ratio is now well below GFC levels (although the PBOC was more aggressive with decreasing the RRR in the early 2010s).?

The next day on September 25, the Politburo, chaired by Xi Jinping, signaled its intention to strengthen policy easing, specifically mentioning stepping up fiscal support, in addition to monetary easing, assisting the property market, and supporting equity prices. Since the core problem in China is the bursting of a debt-fueled property bubble, Xi's intention to increase fiscal stimulus was a boon to sentiment for the Chinese economy. The collection of easing measures boosted Chinese equities and added to the jump in "animal spirits" across markets.?

The positive sentiment on China assets spilled over to global markets. US equities continued to reach all-time highs, while corporate bond spreads continued to grind tighter, led by the lowest-quality tiers. In the chart below, CCC-rated bonds tightened significantly versus BB-rated bonds, illustrating the repricing of credit risk in the context of aggressive easing. The risk of a credit event is much lower with the "Fed put," let alone combined with a "China put."?

While the major policy easing by the FOMC and China are for different reasons – maintaining the expansion in the US versus fighting a property market crash in China – the one/two punch of the two largest economies should provide support to risk assets and growth-linked sectors over the coming weeks.??

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