Chief Investment Strategist, The Freeport Society
Hello, Fellow Navigator.
When China goes big, it goes big.
That’s the reality of being the world’s second-largest economy with a population of 1.4 billion people.
And China just went in big to jumpstart its economy.
The People’s Bank of China (PBOC) – China’s equivalent of the Federal Reserve – just went in big. It cut interest rates and lowered reserve requirements for banks (making it easier for them to lend). Though the details are still murky, the PBOC also mandated that mortgage rates be lowered across the board by the end of October. And that’s all existing mortgages, not just new loans.
So, every Chinese homeowner with a mortgage is about to have a little more spending money in their pocket.
That’s not all…
The PBOC is also intervening in the stock market, incentivizing a wave of stock buybacks. As The Economist reports:
The central bank will help firms buy back their own shares by refinancing bank loans used for that purpose. And it will help securities companies, insurers and other institutional investors raise funds by making their balance-sheets more robust. They will be able to borrow safe, liquid assets like government bonds from the PBoC, using their riskier, less liquid assets, such as stocks, as collateral. The combined size of these tools was 800bn yuan ($114 billion), [PBOC Governor] Pan said, although he could double or triple that limit if need be. “It is all possible,” he concluded.
And there’s still more!
The Chinese government is planning to issue 2 trillion yuan in new debt, half of which will go to local governments, with the other half being used to motivate spending. The Economist continues:
Some of this second trillion will be ploughed into the government’s existing “cash for clunkers” scheme, which encourages firms and households to trade in old equipment, cars and appliances for newer, greener gear, from electric vehicles to “smart toilets”. The rest will help finance a monthly handout to expanding families: about 800 yuan per child, excluding the first.
That’s just the central government. Chinese cities are getting in on the action, too.
Shanghai, Guangzhou, and Shenzhen all announced they were loosening rules on home buying and lowering the minimum down payment for first and second homes.
Let’s talk about what this means… and what it doesn’t.
China’s Moves Explained
To start, it means that FOMO – the “fear of missing out” we saw in 2020 and 2021 – is getting a Chinese translation.
Chinese stocks, which have been trending lower for years, are up by nearly a third in just days, as you can see from the chart below. . In an interview last week, CNBC asked American hedge fund titan David Tepper what he would buy in China following the stimulus. His one-word response?
“Everything.”
China CSI 300 Stock Index
If you’re feeling the FOMO itch, you can jump on the bandwagon by buying a Chinese ETF like the Xtrackers Harvest CSI 300 China A Shares ETF (ASHR). But if emerging markets aren’t your thing, there are other ways to play this.
Remember, capital has a way of sloshing across borders. Even with China’s capital controls, some of those trillions of yuan in new liquidity will find their way into Western stock markets… and into currency alternatives like gold and Bitcoin.
Protecting against dollar depreciation is one of our central themes at The Freeport Society, but the dollar is by no means unique. Chinese investors have an even greater incentive to protect themselves from currency mismanagement as we Americans do.
So, stay long gold… and stay long cryptocurrencies.
What China’s Moves Don’t Do
I expect the PBOC to be wildly successful in inflating asset bubbles both inside and outside of China.But inflating asset prices isn’t their actual goal. That’s a bug, not a feature.
The PBOC is hoping – just as the Fed did following the 2008 meltdown – that its actions will jumpstart the Chinese economy, which has been stuck in a deflationary slump.
I’m a lot more skeptical here.
What did the Fed’s actions in 2020 and 2021 really accomplish? Inflated stock prices? A bubble in Bored Ape NFT art? (That was an actual thing, by the way.) They didn’t spur much in the way of real economic activity.
And China has problems that interest-rate tweaks can’t fix. Its population is shrinking… and those who remain are aging rapidly. As I wrote a few weeks ago, China’s population started to decline in 2022, and most recent estimates show the country’s population shrinking by 109 million by 2050.
To put that in perspective, that’s roughly the populations of Germany, Belgium, and Sweden combined.
About 21% of the population is 60 or older. In about 10 years, a full third will be at that milestone.
At 60, you’re probably still working and commanding a good salary. You might be enticed to upgrade your house or buy a vacation home for when the grandkids visit. But the older you get, the less likely you are to do any of that. What are you going to buy on credit that you don’t already own?
Does it make a lot of sense to build new apartments when there are fewer and fewer people to live in them with each passing year? Estimates are all over the map, but China is believed to have 65 million to 80 million empty homes already.
Over the long term, China’s prospects look utterly horrid. You’d have to be stark raving mad to buy property there. But we can still score profits in the meantime by getting in front of the trillions in new yuan that are about to flood the capital markets.
This situation is just one facet of the broader trend of deglobalization, one of the core investment themes we focus on at The Freeport Investor, and one that creates unique opportunities. As the world’s economic landscape causes whiplash, we don’t want you to suffer.
That’s why I try to make The Freeport Investor the best way to stay ahead of any shock on the horizon. For more on how you can join my flagship service, click here.
To life, liberty, and the pursuit of wealth,
Charles Sizemore
Chief Investment Strategist, The Freeport Society