Why markets rallied after China’s big news

Hey Superheroes,

We’re seeing history in motion this week… Cocoa prices have nearly hit a 50-year high thanks to severe weather and crop diseases. 

That comes after Cadbury’s Freddo and Caramello Koalas already doubled their prices earlier this month for the first time in decades! As if Coles’ and Woolies’ alleged “discounts” weren’t enough to think about.  

Anyway, enough about chocolates. Let’s talk about one of the biggest factors of this week’s market movements.

Chinese stocks, ASX miners rally after China’s big news

Over the last week, Chinese stocks posted double-digit gains: Alibaba jumped nearly 17%, Baidu gained over 17%, Pinduoduo soared almost 30% and JD.com added more than 37% of market value. 

It’s the same story with several miners on the ASX, especially iron ore miners. BHP, Rio Tinto and Fortescue all jumped over 10% after iron ore posted its steepest intraday price gain in recent months.

And the cause of all these? China’s latest stimulus package, which is expected to inject at least 2 trillion yuan (approx. A$414 billion) of liquidity into the Chinese economy.

🇨🇳 Biggest package since Covid

Here’s some of the changes the People’s Bank of China’s (PBoC) stimulus package is bringing:

• A rate cut of 20 basis points to the seven-day reverse repo rate (the rate a Central Bank pays to borrow money to commercial banks).
• Reduction of an average 50 basis points on interest rates on existing mortgages.
• A swap programme worth 500 billion yuan (~A$103 billion) that allows funds, insurers and brokers easier access to funding to buy stocks.
• Up to 300 billion yuan (~A$62 billion) in loans from the central bank to commercial banks to help them fund the share purchases and buybacks of publicly-listed companies.
• Lowering the Required Reserve Ratio (RRR) by 50 basis points.

🤔 What’s the “Required Reserve Ratio”? 

The RRR is the minimum percentage of a bank’s deposits that it must hold as cash in reserves. The purpose of this is to ensure that banks are able to meet liabilities in case of mass withdrawals.

It’s also sometimes used as a monetary policy tool, as in China’s case, to limit or relax the country’s money supply.

As such, China lowering the RRR by 50 basis points unlocks an estimated 1 trillion yuan (~A$207 billion) in liquidity for new lending.

The PBoC has also noted that the RRR may be lowered by a further 25-50 basis points in the future.

🔥 So that’s why markets rallied…

The new stimulus package is set to inject trillions of yuan into the Chinese economy. With part of it specifically directed at the stock market, it’s no surprise that Chinese stocks rallied following the news.

Similarly, the package aims to boost China’s lagging property market. Perhaps that can explain why many of the commodities (and their related stocks!) needed for infrastructure, such as iron ore and copper, can now say that this week was a good week. 

Even our Treasurer Jim Chalmers thinks China’s stimulus measures are “very, very good” for Australia. 

Disclaimer: He did say that while speaking to the media in Beijing.

🔦  Some other things we’re shining the Spotlight on:

• WISH UPON A FALLING STAR: After a long delay (and a month-long trading halt), the Star is finally back in the market… albeit down by over 40% today. Apparently,  the casino operator ended last financial year with a A$1.69 billion loss.
• RBA’S NUMBERS: The RBA cash rate decision and monthly inflation data were both released this week. Headline inflation came in at a three-year low of 2.7% (albeit thanks to the energy bill rebates), a day after the RBA decided to keep rates on hold. The next RBA meeting will be in November. 
• NOT SO SUPER MICRO COMPUTER: Super Micro Computer fell over 12% overnight after news that the U.S. Department of Justice opened a probe into the AI firm. There are apparently concerns of “accounting manipulation.” 

Keep up to date on the markets by following us on Instagram, @superheroau!