China’s central bank surprised investors with stimulus measures and said it is planning future interest rate cuts.
Chinese stocks rallied today after the People’s Bank of China (PBOC), trying to get the Chinese economy out of its recent slump, announced interest rate cuts and better stimulus measures than previously expected.
Shares of the artificial intelligence (AI) and search company Baidu (BIDU 7.40%) traded nearly 5% higher, while shares of the shipping platform Full Truck Alliance (YMM 10.21%) rose nearly 9%. Meanwhile, shares of the online video platform Bilibili (BILI 17.02%) surged nearly 13%.
Will stimulus be enough?
Following the Federal Reserve’s interest rate cut of 50 basis points (bps) last week, investors upped their bets that China would soon follow suit, but the announcement by the PBOC seemed to catch the market by surprise. China’s central bank told reporters that it plans to lower banks’ reserve requirements by 50bps shortly, and that there may be additional decreases to bank reserve requirements. Additionally, the PBOC lowered the seven-day reverse repo rate by 20bps to 1.5%.
China’s central bank also passed measures aimed at helping China’s ailing housing market. These included a 50bps reduction on average interest rates for existing mortgages and a lowering of down payments to 15% on all homes. The PBOC also plans to inject funds into the capital markets, including 500 billion yuan for a program that financial companies can access to buy stocks and 300 billion yuan in loans to commercial banks, which those banks can use to buy stocks or repurchase their own stock.
“This is the most significant PBOC stimulus package since the early days of the pandemic,” Julian Evans-Pritchard, an analyst at Capital Economics, said, according to Reuters. “But on its own, it may not be enough.”
China’s economy continues to experience problems, from housing woes to high unemployment. Analysts have recently been taking down their GDP estimates for 2024 to below the Chinese government‘s target of 5%. Retail sales and industrial production data disappointed in August.
In other, more company-specific news, analysts at Citigroup this morning opened up a “90-day positive catalyst watch” on Full Truck Alliance, saying that monthly user growth over the last two months gives them confidence in upcoming earnings results for the fourth quarter of 2024. In their research note, the analysts said they think order volume could surpass 20% growth year over year, despite broader difficulties in the Chinese economy and the impact of a typhoon in the Yangtze River Delta. Citigroup has a buy rating on the stock and a $12 price target, implying about 50% upside from current levels.
Much uncertainty ahead
Many suspect the Chinese economy will eventually turn the corner, and the stimulus announcement will certainly help. But there is still no guarantee that it will happen anytime soon, so investors may need to stay patient.
I think Baidu, Bilibili, and Full Truck Alliance are all worth investing in. Baidu has strong AI capabilities and trades at a reasonable 12 times earnings. Bilibili has been slowing its quarterly losses, and the stock is up nearly 52% this year. It’s very encouraging to see Full Truck Alliance growing users in a tough economy, given that shipping is a cyclical business.
That said, Chinese stocks come with several complexities, such as a more impactful regulatory landscape. So if you don’t have time to conduct extensive research on the individual companies and the regulatory environment but want some exposure to China, an exchange-traded fund or mutual fund might be the easier play.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.
