CHINA RAMPS UP STIMULUS, WHICH PROVIDES A FURTHER BOOST TO RECENT RAND RALLY

This is an extract from the Weekly Review of 27 September 2024. The full Weekly can be found here (for free, but sign up if you want to receive notifications of new editions and other BER publications)

The Week in Perspective, written by Lisette IJssel de Schepper

The most unexpected development over the past few days has been the announcement of far-reaching stimulus measures in China. While it was long anticipated that the government would step up on stimulus to prop up sluggish growth momentum, measures introduced so far have been underwhelming. As such, the extent of this week’s intervention was bigger than most expected. Hogging the local headlines was the rand exchange rate continuing its recent strengthening trend and dipping below R17.15/$ during yesterday's trade. It is currently hovering around the best level since February 2023. As usual,? global factors are at play, with the Chinese stimulus announcement helping the ‘commodity currency’ and general risk appetite, but it must be said that SA financial assets are generally performing quite well. Indeed, the JSE all share index rose to a record high on Thursday.

To start with China, authorities introduced a comprehensive stimulus package aimed at reviving its slowing economy. On the monetary front, the People’s Bank of China (PBoC) announced a significant injection of liquidity into the financial system, with the goal of stabilising markets and boosting investor confidence. At the core of the package is an 800 billion yuan ($113 billion) programme to support the equity market, with more plans to establish a market stabilisation fund. Further monetary easing measures (incl. policy rate cuts) were announced to support the ailing property market, with the PBoC vowing to take quick action to boost the economy. Later in the week, the government essentially promised that the necessary spending to hit its 5% growth target would take place, with more details about the fiscal package expected next week. ?The question remains whether the measures will be targeted enough to address the deep, structural issues in the property sector in particular, but, for now, China’s equity market responded positively to the announcements. The CSI 300 benchmark index rose further this morning and is on track for a more than 13% gain this week. This would be the best weekly gain since late 2008, when China introduced a large stimulus package in response to the global financial crisis.

On the global data front, the poor Eurozone PMI print (see international section) added to bets that the European Central Bank (ECB) will cut faster and/or by more than previously priced in. There are particular concerns about Germany, while the Olympics-boost to French activity was not sustained in September. France does, finally, have a government in place. However, amid concerns about low growth and increased fiscal pressure, the French sovereign debt profile continued to deteriorate with 10-year yields now above those of Spain. This is the first time this happened since 2007. Meanwhile, in line with expectations, the Swiss National Bank cut its policy rate by a further 25bps to 1% and said it is prepared to intervene in currency markets if needed. Across the Atlantic, disappointing consumer confidence data from the US early in the week bolstered the case for deeper rate cuts by the US Federal Reserve (Fed) following its outsized 50bps cut last week. This propelled the gold price to a record high.

Back to local headlines, the ANC-led removal of the DA’s Cilliers Brink as executive mayor of Tshwane reminded us that despite positive signs of the national government working well together, things might be different on a more localised level. Furthermore, while the figures have been floating around for some time, it was confirmed that Eskom applied to NERSA for a 36.2% increase in electricity tariffs in the 2026 financial year, followed by 11.8% in 2027 and 9.1% in 2028. While it remains to be seen what NERSA will grant the power utility (which is unlikely to be the full 36%), this does provide a real upside risk to inflation as it not only directly pushes up the electricity component of CPI, but also trickles to other prices as producers recoup costs. Of course, higher electricity costs continue to support the investment case for switching to renewable energy.

The continued strength in the rand exchange rate and the further dip in the Brent crude oil price have been more positive for local inflation – most notably through lower fuel prices, with another hefty decline expected next week. Reports that Saudi Arabia is ready to abandon its unofficial price target of $100/bbl and wants to ramp up production to regain market share have pushed oil prices lower. While OPEC+ production cuts have helped to keep prices elevated, this was countered by big increases in non-OPEC supply (the US) and lower demand from China.

Geopolitical risks in the broader Middle East region in particular, however, remain important for oil price dynamics Following the ‘pager attacks’ earlier this month, Israel continues its bombing campaign on Lebanon. The strikes have resulted in a rising death toll and civilians fleeing the area. Hizbollah (Israel’s attended target) is firing projectiles back at Israel and says that they will continue to attack until a ceasefire deal is reached in Gaza. Following reports that Israel was preparing for a ground offensive in Lebanon, international calls for a ceasefire between Israel and Hizbollah intensified, with the hope that a (temporary) truce reached there could also aid discussions around Gaza.

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Editor: Lisette IJssel de Schepper

Tel: +27 (21) 808 9777

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