As if this week was not busy enough, China announced a $1.4 trillion stimulus package to support a slowing economy and the potential negative impact from Donald Trump’s economic policies.
China bails out local governments
The bulk of the stimulus is linked to local government. Beijing has agreed to raise the debt ceiling from local governments to 35.5 trillion yuan, which will allow them to swap ‘hidden debt’ to the tune of 6 trillion yuan. There is also another 4 trillion yuan of special 5-year bonds that will be available to local government.
The news has fallen flat with financial markets. Chinese stocks are lower, the CSI 300 is down more than 1%, and European stocks are lower across the board. The S&P 500 is expected to open above the key 6,000 level, which is a further sign of American exceptionalism and the US’s immunity to the rest of the world’s woes. There is a risk off tone to markets today, bond yields are lower across the board and oil and some industrial metals are also lower today.
The problem with China’s stimulus measures is that they are not stimulus. They are essentially a debt swap to shore up local government’s finances. The market reaction shows that traders do not see these measures as boosting consumption, and instead they are designed to stop a financial crisis domestically in China.
Why Beijing’s stimulus won’t boost consumption
The government announced the measures by saying that the debt swaps will save around 600 bn yuan in debt interest payments over 5 years, which can then be diverted to boost investment and spending. However, it is unclear how this can happen, especially since the unwinding of the property bubble is ongoing. If the Chinese government wanted to boost investment and consumption, there are better ways of doing it than helping local government. A more effective way would be to give the stimulus directly to the consumer. The debt swap may help to ward off deflation and may mean that the Chinese economy does not get worse, however, it is not clear how it will boost consumption.
Is this the end of the road for China stimulus
The latest stimulus measures suggest that we may have come to the end of the road when it comes to China’s latest stimulus package that started in September. The initial round of stimulus in the Autumn started a record-breaking rally. However, the impact of stimulus since then has had a less positive reaction on Chinese stocks, although the CSI 300 is higher by 22% in the last 3 months.
American stock market exceptionalism set to continue
Without a stimulus bazooka from China, we can assume that American stock market outperformance will continue. Nvidia reached a fresh record high yesterday and is now the world’s most valuable company. Mid cap stocks could not keep pace with large caps on Thursday, however the Russell may be able to bounce back on Friday now that bond yields are falling.
The Trump trade is pausing on Friday, and the dollar is backing away from Wednesday’s high. The dollar index is nearly back at pre-election levels. Dollar weakness may also be a reaction to the Fed meeting. Although the Fed would not commit to the future path of interest rates, the Fed Fund Futures market is still pricing in a 70% chance of second rate cut in December, which could be weighing on the dollar.
Ahead on Friday, we will be watching to see if the US stock market closes above 6,000, a key psychological level that will likely herald another leg higher in US blue chips.
CFD’s, Options and Forex are leveraged products which can result in losses that exceed your initial deposit. These products may not be suitable for all investors and you should seek independent advice if necessary.
Recommended Content
Editors’ Picks
EUR/USD struggles to hold above 1.0400 as mood sours
EUR/USD stays on the back foot and trades slightly below 1.0400 following the earlier recovery attempt. In the absence of high-tier data releases, the negative shift seen in risk mood helps the US Dollar gather strength and forces the pair to stretch lower.
GBP/USD declines toward 1.2500 on renewed USD strength
GBP/USD loses its traction and declines to the 1.2500 area in the second half of the day on Monday. The US Dollar (USD) benefits from safe-haven flows and weighs on the pair as investors await US Consumer Confidence data for December.
Gold drops below $2,620 as US bond yields edge higher
After starting the week in a quiet manner, Gold comes under bearish pressure and retreats below $2,620. The benchmark 10-year US Treasury bond yield stays in positive territory above 4.5%, making it difficult for XAU/USD gain traction.
Bitcoin fails to recover as Metaplanet buys the dip
Bitcoin hovers around $95,000 on Monday after losing the progress made during Friday’s relief rally. The largest cryptocurrency hit a new all-time high at $108,353 on Tuesday but this was followed by a steep correction after the US Fed signaled fewer interest-rate cuts than previously anticipated for 2025.
Bank of England stays on hold, but a dovish front is building
Bank of England rates were maintained at 4.75% today, in line with expectations. However, the 6-3 vote split sent a moderately dovish signal to markets, prompting some dovish repricing and a weaker pound. We remain more dovish than market pricing for 2025.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.