(BFM Bourse) – The country’s central bank has decided to take several measures to support a flagging Chinese economy and restore purchasing power to households. Luxury and spirits groups are making significant progress on the stock market following these announcements.
For many months, the market has been waiting for the Chinese government to deploy major measures to revive a flagging economy. The latest indicators published last week, whether retail sales or industrial production, have once again confirmed that the Chinese economy is slowing down.
“Recent macroeconomic data from China has deteriorated, calling into question the economy’s ability to meet its 2024 GDP growth target of 5%. The economy continues to suffer from a housing crisis with deteriorating new home prices, weak consumer confidence, a deflationary economy, contractionary PMIs and subdued spending,” Royal Bank of Canada said.
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The Chinese authorities finally decided to act with a first electroshock on Tuesday. The People’s Bank of China, the country’s central bank, announced a series of measures to support the economy. The institution reduced a short-term key rate to 0.2% from 0.25% previously and also lowered by half a percentage point the required reserve ratio, that is, the reserves that commercial banks must deposit with the central bank.
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Reviving real estate
The measures will free up liquidity that will allow banks to lend more to businesses and households to shore up the economy. According to the governor of the People’s Bank of China, Pan Gongsheng, quoted by AFP, the reduction in the reserve requirement ratio will inject about 1,000 billion yuan into the economy, or about 130 billion euros.
Other measures are aimed specifically at boosting the real estate sector, which has been suffering for three years now in China. A 0.5 percentage point cut on existing mortgages has been announced and the minimum down payment on the purchase of a second home has been reduced.
Pan Gongsheng also indicated, selon Bloomberg that the central bank would provide about 800 billion yuan in liquidity to brokers to support stock markets, or 103 billion euros. The establishment of a market stabilization fund is also under consideration, he added.
These provisions remain, for the moment, targeted. “While these stimulus measures are welcome, they do not constitute a ‘bazooka’,” judges Royal Bank of Canada.
But these measures have the merit of focusing on real estate and stock markets, two important pillars for the Chinese wealth. Analyst at the research firm Alphavalue, Jie Zhang explained last year to BFM Bourse that real estate represented 70% of the wealth of Chinese households.
“We expect the stocks we cover to respond positively to the easing of Chinese monetary policy conditions. In particular, our coverage of the luxury sector, whose average exposure (to China) is 27% at the income level,” Royal Bank of Canada explained in a note published Monday morning.
Towards other measures?
This is indeed the case: luxury groups are propelled on the stock market by China. Around 10:30, Kering is up 5.8%, LVMH 4.5%, L’Oréal 3.9%, Hermès 4.4%. In London, Burberry is up 4.3% and in Zurich, Cartier owner Richemont is up 4.3%. Other sectors dependent on China, such as spirits, are doing well. Pernod Ricard is up 2.7% and Rémy Cointreau is up 3.9%.
“Certainly, the measures announced this Tuesday are not exceptional and remain limited. But they send a strong signal showing that Beijing is committed to supporting its economy. And this could herald other more important announcements. This is what the market is buying today,” judges a luxury analyst.
China’s announcements come at a time when luxury is losing steam on the stock market, due to sharply slowing growth. On Monday, Bank of America gave a gloomy outlook for the sector, predicting a 1% decline in revenue in the second half of 2024 and growth of just 3% in 2025, light years away from the figures the industry was seeing just a short while ago.
The American bank mentioned in particular the deterioration in the strength of consumption in China, which had until then been the only contributor to growth in the first half of the year.
“We expect Chinese luxury spending to decline by 1% in the second half of 2024 and remain stable in 2025, but the risk is still tilted to the downside (on its forecast) given the gradual deterioration of recent times,” the American establishment wrote.
“At this stage, Chinese consumers are not spending, given the increased macroeconomic uncertainty and the lack of visibility on future spending abroad if favorable price opportunities in neighboring countries, such as Japan, disappear,” explains UBS bank, in a note published on Tuesday.
Julien Marion – ©2024 BFM Bourse
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