A bond subscription was also announced, as Camacho detailed. This means that resources can be allocated to enable local entities to acquire housing inventories that have not sold in the market, thereby enhancing the liquidity of the balance sheets of companies and institutions associated with this sector. The goal is to release resources that have been trapped due to the downturn in the real estate sector.
“At the beginning of this week, authorities requested that the main commercial banks lower the interest rates on existing mortgage loans. This aims to ease the financial burden of meeting these obligations and to increase households’ disposable income, thereby boosting the country’s internal demand,” Camacho added.
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The real estate sector has faced significant challenges for several months. When did this issue begin? Following the 2008 crisis, the Asian nation implemented measures aimed at stimulating its medium-term growth, but real estate was one sector that did not benefit, according to Andrés Valqui, a senior economist and macro specialist at the Peruvian Institute of Economics (IPE). As a result, companies in this sector began accumulating debt to fund new projects, which ultimately led to over-indebtedness. The repercussions of this situation are still evident today.
Beyond the real estate sector, the set of measures also includes additional strategies to enhance liquidity. For instance, reserve requirements were reduced, and further cuts in interest rates of 25 to 50 basis points are not being ruled out, stated Hugo Perea, chief economist at BBVA Research. “It is believed to be a robust package and, if effective, China could achieve its targeted growth rate of 5%,” he explained.
Moreover, the existing mortgage loan rate has been decreased. “If you already have a loan, the interest rate will reduce by 50 basis points, which is what is being implemented. Additionally, the requirements for purchasing a second home have been relaxed, as the initial payment has been lowered,” he added.
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On another note, Mario Guerrero, Investment Strategy Manager at Scotia Wealth Management Peru of Scotiabank, mentioned that the measures announced by the Chinese government typically occur in September and October, coinciding with celebrations for the Communist Party and the formulation of five-year plans for the country. He believes this latest package is the most significant since the measures taken during the pandemic in China and has also elicited an important response in the markets.
Why were the measures taken?
According to Valqui, although the Chinese economy grew by 5.3% in the first quarter and by 4.7% in the second, growth is projected to be lower in the third and fourth quarters. Therefore, the estimated 5% growth in China may not be achieved.
Guerrero pointed out that while the Chinese economy has not found itself in a dire situation, there were signs of concern. These concerns were not related to growth; rather, they emerged from other indicators that showed a more pronounced slowdown, such as retail sales and ongoing problems in the real estate sector.
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“This was evident in the financial markets, with declines in Chinese stock markets and a shift in behavior reflecting caution among investors, who sought refuge in bonds. In fact, bond yields had reached a historical low before these measures were announced, indicating a prevalent sense of uncertainty among investors in Chinese bonds,” he explained.
According to the representative from Credicorp Capital, there are three main points. The first is that the Chinese economy has been facing structural challenges since 2022.
“The Chinese economy has excess capacity, unlike what we see in many Latin American countries, which face a deficit in infrastructure. This presents challenges if that accumulation of capital is leveraged because, without usable infrastructure, investment cannot yield profits.” he explained.
The second issue relates to the aging population. Although China still has a large working-age population, reaching a population peak two years ago means that domestic consumption capacity may not be robust enough to meet the country’s growth targets.
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The third point concerns the tensions with the West, as Camacho added. “There are conflicts in the technology sector, whether related to access to semiconductors or the machinery to produce them, or with electric vehicles that have recently gained attention in China, the United States, and Europe. This situation has imposed serious limitations on economic growth in the United States, prompting Communist Party authorities to launch these strategies in response.” he stated.
Reactions
Camacho emphasized that the decision by China’s economic authorities followed the Federal Reserve (FED) initiating its cycle of rate cuts. Although data on economic activity had been consistently lower than expected for several months, it was only when the FED adopted an expansionary approach that Chinese authorities took similar actions.
“The timing of this decision is crucial, as China’s vast manufacturing capacity requires financial sophistication, which could have led to adverse results if the FED had not already shifted to an openly accommodative cycle,” said Camacho. He believes the markets would not have reacted positively to Chinese decisions without a supportive FED.
Consequently, the initial reaction to China’s decision has been one of optimism, Camacho noted. “If the world’s largest economy is approaching US$2,700 per ounce and growing 15% this past quarter, then the world – represented by China – appears to be moving in the same positive direction, providing more reasons to expect an improvement in global liquidity,” he pointed out.
According to Perea, since the measures were announced, the CSI 300 — the stock index of the 300 main stocks listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange — has increased by approximately 19%, with an 8.5% rise recorded just yesterday. “We can expect these types of supportive measures on the financial side. However, it remains uncertain whether this financial improvement will quickly reflect in the real economy. Our team believes it may take some time, but thus far, the markets have responded positively,” he stated.
Impact on metals
Camacho explained that the biggest investment asset globally is the Chinese real estate sector, and due to falling house prices and the associated challenges, many resources that normally enhance global liquidity are currently trapped in this sector.
Therefore, if these measures succeed in stabilizing housing prices and stimulating this sector, global liquidity is likely to increase. Financial asset prices would likely respond first to these measures, and following that, emerging markets might experience similar movements regarding commodity prices.
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“We have observed that the price of copper will be another significant element reacting to these announcements, although the effectiveness of the current measures can only be assessed within a timeframe of one year to 18 months,” he added.
Meanwhile, Guerrero explained that for the global economy—significantly influenced by China—commodity prices, particularly metals like copper, are crucial as they can positively affect the Peruvian economy.
“The price of copper has increased by 12% since September 12 and 2.5% over the quarter. Although this might seem insignificant, it has essentially formed a ‘U’ shape, having slowed down due to a lack of vitality in Chinese indicators. However, following these stimulus measures, it has turned around and shown growth this month. ‘Copper has a bullish outlook for the medium term, which is favorable for the Peruvian economy,’” Guerrero explained.
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In addition to copper, steel has experienced a 22% increase since its lowest point on August 15 and has grown by 3.5% in the past quarter. In both scenarios, these metals are tied to industrial activity, and their price trends are encouraging. Guerrero noted that this outlook suggests the global economy is aligning with the anticipated scenarios, indicating positive signals for future global growth.
This is complemented by the price of gold, which continues to set records, nearing US$2,700 per ounce, and increasing by 15% over the last quarter (July – August – September).
“We see that our two main export products, gold and copper, are performing excellently in the third quarter, with copper benefiting from the stimulus measures being implemented in China,” Guerrero noted.
China’s Latest Bond Subscription Announcement: A Strategic Move to Revitalize the Real Estate Sector
A bond subscription was also announced, Camacho detailed; that is to say, it will be possible to channel resources so that local entities can acquire housing balances that have not been able to be sold on the market so that the balance sheets of the companies and institutions around this sector can have liquidity. This, with the aim of unlocking the resources that were trapped with the collapse of the real estate sector.
“At the beginning of this week, the authorities asked the main commercial banks to generate a cut in the interest rates charged on mortgage loans that have already been contracted. This seeks to alleviate the financial burden in fulfilling these obligations in an attempt to energize and increase the disposable income of households, trying to materialize an increase in the country’s internal demand.” Camacho added.
The Troubled Real Estate Sector
The real estate sector has been in the eye of the storm for several months. When did the problem originate? After the 2008 crisis, China implemented measures to boost its medium-term growth. One of the sectors that did not benefit was real estate, explained Andrés Valqui, senior economist and macro specialist at the Peruvian Institute of Economics (IPE). Thus, companies dedicated to this sector began to go into debt in order to finance new projects until they reached over-indebtedness. The consequences are seen to this day.
Additional Measures for Liquidity
Beyond the real estate sector, the package of measures also incorporates other strategies related to providing greater liquidity. For example, reserve requirements were reduced, and additional cuts of between 25 basis points to 50 basis points in interest rates are not ruled out, said Hugo Perea, chief economist at BBVA Research. “It is thought to be a robust package and, if this works, China could guarantee a growth rate like its target.” [5%]
Mortgage Loan Rate Cuts
Likewise, the existing mortgage loan rates have been cut. “If you have a loan and pay a rate, it will drop by 50 basis points, that is what is being decreed. Also, the requirements to buy a second home have been relaxed, as the initial payment has been reduced.” he added.
Reasons Behind the Measures
According to Valqui, although in the first part of the year China’s economy grew by 5.3% and 4.7% in the first and second quarters respectively, growth is expected to be lower in the third and fourth quarters. Thus, the 5% growth estimated in that country would not be met.
Guerrero noted that it is not that the Chinese economy has been in a very difficult situation, but there were signs of concern. Although these were not on the growth side, they were on the other indicators that showed a slightly more marked slowdown, such as retail sales and the problems in the real estate sector.
Concerns About the Economy
“This was reflected in the financial markets, with declines in the Chinese stock markets and also with behavior as a consequence of this caution among investors, who sought adequate refuge in bonds. In fact, bond yields, until before these measures, had reached their historical minimum level, which reflects that, indeed, there was a feeling of uncertainty and refuge among investors in Chinese bonds.” he explained.
Challenges Facing the Chinese Economy
For the representative of Credicorp Capital, there are three initial points related to the challenges facing the Chinese economy:
- Excess Capacity: Unlike the observed lack of infrastructure in Latin American countries, China has excess capacity, leading to reduced investment profitability.
- Aging Population: Though China still has a significant working-age population, domestic consumption is weakening.
- Geopolitical Tensions: Issues related to technology sectors, semiconductors, and electric vehicles have strained growth prospects.
Market Reactions
A notable observation made by Camacho is that the decision of the Chinese economic authorities follows the Federal Reserve’s (FED) initiation of rate cuts. Although the economic data had been weak for several months, a shift to an expansionary stance by the FED seemed to encourage similar measures from China.
“This timing is important to analyze. With all the manufacturing capacity that China has, it needed to respond thoughtfully; otherwise, adverse reactions could have occurred if the FED was in a different cycle.” Camacho noted.
Optimism in the Markets
Initially, the market response to China’s decisions has been optimistic. Camacho highlighted that recovery in China, as the largest economy, could positively influence global liquidity.
Analysts noted a significant uptick in the CSI 300 index, which rose approximately 19% since the announcement, with an 8.5% surge on the recent day alone. “We will see financial sector support, though its impacts on the real economic sector may take time to manifest.” Perea cautioned.
Effects on Metal Prices
Camacho noted that the Chinese real estate sector is the largest global investment asset, and the stagnation of housing prices has restricted global liquidity. Successful measures could stimulate the sector and, in turn, enhance liquidity across the globe.
According to Camacho, “We can anticipate that the price of copper will show initial positive reactions to these announcements, but the full effectiveness of the measures will require a period of evaluation of one year to 18 months.”
Simultaneously, Guerrero affirmed that China holds a critical position in global commodity markets. Recent gains in copper, which rose by 12% since September 12, indicate a bullish trend in the medium term, which is favorable for economies such as Peru.
Positive Trends in Other Metals
Other industrial metals have also shown favorable price movements. Steel prices have surged 22% since mid-August, further indicating optimism for industrial activity. Additionally, gold prices are reaching new heights, close to US$2,700 per ounce with a 15% increase in the third quarter.
In conclusion, the concerted efforts by Chinese authorities are anticipated to bolster not only the domestic economy but also have positive ripple effects across global markets, enhancing liquidity and supporting the recovery of key industries.
