Do the new China economy measures deserve a vote of confidence?

Investor attention is on firmly on the new economic measures in China as they continue to digest the shock plan announced this Tuesday by the People's Bank of China and which drove Asian markets higher. Alberto Matellán, chief economist at MAPFRE Inversión, explains that these measures have a much more general approach than others that have been implemented in recent months, and are more focused on reactivating consumption or specific sectors of the economy in particular.

More specifically, the plan presented this week contemplates the reduction of banks’ reserve ratio, interest rates on existing mortgage loans and a relaxation of the requirements for purchasing second homes, among other aspects. The end goal is to meet the growth target of 5% set by the government for 2024.

“The government is very determined not only to reactivate the economy, but to send a message to the market and that message is to get back on track. In addition, it’s a powerful message because the plan is not just aimed at consumption or a specific sector of the economy – it’s of general application. When we combine generality with intentionality, we can interpret it as powerful,” says Matellán.

However, the Chinese economy has many problems, and the main one is confidence. “It’s an important problem that isn’t talked about as much, both because of certain decisions taken by the government, because of geopolitics and because of economic developments,” says the chief economist, who believes that the new plan deserves a vote of confidence. Matellán also emphasizes what underlies this plan: the government is willing to do more and take further measures, if these don’t deliver the expected results.

Rate cuts in the United States

The 50-basis point reduction by the US Federal Reserve (Fed) at the September meeting gave the markets - which has been expecting this cut -a boost. “Market expectations also influence. If the reduction had been only 25 bps, it would have been interpreted almost as a tightening,” Matellán noted.

However, he insists that the macroeconomic data don’t justify such an aggressive reduction. "The US macro situation hasn’t deteriorated enough to justify a 50-point downgrade," he said.