China Turns The Tap Back On


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What's going on?

Just as global investors were getting worried about policies coming out of China, the Chinese government took a major step to reinvigorate its support for the economy.

What does this mean?

The mechanics of how the Chinese government supports its economy are a little complicated (you can learn more here). Put simply, it does things that push down interest rates when it wants to be supportive as that encourages borrowing and, thus, spending to boost the economy. In recent months, however, China has been pushing up interest rates, partly because it doesn’t want its economy to get artificially “overheated” (which can cause bubbles to build).

The effort appears to have had an impact: there are signs that China’s economic growth is slowing and there has been turmoil in Chinese markets. But on Tuesday China took a big step to push interest rates back down (tweet this) – likely signaling to investors that it isn’t going to remove support very quickly.

Why should I care?

For markets: China’s actions had risen to the top of investors’ list of worries.

According to a widely followed survey released on Tuesday, global investors think the prospect of the Chinese government paring back support for its economy is the biggest risk to global stocks right now (supplanting political risk in Europe). If Tuesday’s move is indeed signaling that the Chinese authorities will only ease support very cautiously, that’s likely a positive for global investments (at least in the near term).

The bigger picture: China will probably provide less of a tailwind to global markets this year than last year.

China undertook a huge program to boost its economy last year, which had significant knock-on effects for global investors. For example, higher commodity prices driven by increased Chinese buying boosted profits for big miners and companies that supply them. Also, exports into China increased, which helped lots of other economies. Regardless of whether support from the government declines, the lack of any new support means China is unlikely to boost global economic growth as much as it did last year.

Originally posted as part of the Finimize daily email.

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