A China Resources property under construction in Nanjing, Jiangsu province, China, Sept 24, 2024.
Cfoto | Future Publishing | Getty Images
BEIJING — China’s slowing economy needs more than interest rate cuts to boost growth, analysts said.
The People’s Bank of China on Tuesday surprised markets by announcing plans to cut a number of rates, including that of existing mortgages. Mainland Chinese stocks jumped on the news.
The move may mark “the beginning of the end of China’s longest deflationary streak since 1999,” Larry Hu, chief China economist at Macquarie, said in a note. The country has been struggling with weak domestic demand.
“The most likely path to reflation, in our view, is through fiscal spending on housing, financed by the PBOC’s balance sheet,” he said, stressing that more fiscal support is needed, in addition to more efforts to bolster the housing market.
The bond market reflected more caution than stocks. The Chinese 10-year government yield fell to a record low of 2% after the rate cut news, before climbing to around 2.07%. That’s still well below the U.S. 10-year Treasury yield of 3.74%. Bond yields move inversely to price.
“We will need major fiscal policy support to see higher CNY government bond yields,” said Edmund Goh, head of China fixed income at abrdn. He expects Beijing will likely ramp up fiscal stimulus due to weak growth, despite reluctance so far.
“The gap between the U.S. and Chinese short end bond rates are wide enough to guarantee that there’s almost no chance that the US rates would drop below those of the Chinese in the next 12 months,” he said. “China is also cutting rates.”
The differential between U.S. and Chinese government bond yields reflects how market expectations for growth in the world’s two largest economies have diverged. For years, the Chinese yield had traded well above that of the U.S., giving investors an incentive to park capital in the fast-growing developing economy versus slower growth in the U.S.
That changed in April 2022. The Fed’s aggressive rate hikes sent U.S. yields climbing above their Chinese counterpart for the first time in more than a decade.
The trend has persisted, with the gap between the U.S. and Chinese yields widening even after the Fed shifted to an easing cycle last week.
“The market is forming a medium to long-term expectation on the U.S. growth rate, the inflation rate. [The Fed] cutting 50 basis points doesn’t change this outlook much,” said Yifei Ding, senior fixed income portfolio manager at Invesco.
As for Chinese government bonds, Ding said the firm has a “neutral” view and expects the Chinese yields to remain relatively low.
China’s economy grew by 5% in the first half of the year, but there are concerns that full-year growth could miss the country’s target of around 5% without additional stimulus. Industrial activity has slowed, while retail sales have grown by barely more than 2% year-on-year in recent months.
Fiscal stimulus hopes
China’s Ministry of Finance has remained conservative. Despite a rare increase in the fiscal deficit to 3.8% in Oct. 2023 with the issuance of special bonds, authorities in March this year reverted to their usual 3% deficit target.
There’s still a 1 trillion yuan shortfall in spending if Beijing is to meet its fiscal target for the year, according to an analysis released Tuesday by CF40, a major Chinese think tank focusing on finance and macroeconomic policy. That’s based on government revenue trends and assuming planned spending goes ahead.
“If general budget revenue growth does not rebound significantly in the second half of the year, it may be necessary to increase the deficit and issue additional treasury bonds in a timely manner to fill the revenue gap,” the CF40 research report said.
Asked Tuesday about the downward trend in Chinese government bond yields, PBOC Gov. Pan Gongsheng partly attributed it to a slower increase in government bond issuance. He said the central bank was working with the Ministry of Finance on the pace of bond issuance.
The PBOC earlier this year repeatedly warned the market about the risks of piling into a one-sided bet that bond prices would only rise, while yields fell.
Analysts generally don’t expect the Chinese 10-year government bond yield to drop significantly in the near future.
After the PBOC’s announced rate cuts, “market sentiment has changed significantly, and confidence in the acceleration of economic growth has improved,” Haizhong Chang, executive director of Fitch (China) Bohua Credit Ratings, said in an email. “Based on the above changes, we expect that in the short term, the 10-year Chinese treasury bond will run above 2%, and will not easily fall through.”
He pointed out that monetary easing still requires fiscal stimulus “to achieve the effect of expanding credit and transmitting money to the real economy.”
That’s because high leverage in Chinese corporates and households makes them unwilling to borrow more, Chang said. “This has also led to a weakening of the marginal effects of loose monetary policy.”
Breathing room on rates
The U.S. Federal Reserve’s rate cut last week theoretically eases pressure on Chinese policymakers. Easier U.S. policy weakens the dollar against the Chinese yuan, bolstering exports, a rare bright spot of growth in China.
“Lower U.S. interest rates provide relief on China’s FX market and capital flows, thus easing the external constraint that the high U.S. rates have imposed on the PBOC’s monetary policy in recent years,” Louis Kuijs, APAC Chief Economist at S&P Global Ratings, pointed out in an email Monday.
For China’s economic growth, he is still looking for more fiscal stimulus: “Fiscal expenditure lags the 2024 budget allocation, bond issuance has been slow, and there are no signs of substantial fiscal stimulus plans.”
Check out the companies making headlines in after-hours trading: Netflix — The streaming stock popped more than 4% after third-quarter earnings topped expectations. Netflix earned $5.40 per share on $9.83 billion in revenue, while analysts forecast $5.12 a share and $9.77 billion in revenue. The company also said its ad-tier memberships jumped 35% quarter over quarter. Intuitive Surgical — Shares jumped about 5% after the maker of the da Vinci surgical robot posted better-than-expected third-quarter results. Intuitive Surgical earned $1.84 per share on $2.04 billion in revenue. Analysts surveyed by LSEG had estimated earnings of $1.63 per share on $2 billion in revenue. WD-40 — The maintenance product maker’s shares dropped more than 4% after a disappointing fiscal fourth-quarter earnings report. The company earned $1.23 per share, and said it expects fiscal 2025 profits of between $5.20 and $5.45 per share. OceanFirst Financial — Shares advanced 2.8% after OceanFirst announced that it earned 39 cents per share in the third quarter, a penny above the consensus estimates from FactSet. On the other hand, net interest income and net interest margin both came in lower than forecast. MGP Ingredients — The spirits and food ingredient maker’s stock tumbled nearly 20% after the company warned of disappointing third-quarter results and lowered its full year guidance. CEO David Bratcher said its performance was hurt by weak alcohol trends and elevated whiskey inventories. Marten Transport — Shares of the trucking company slid almost 3% after third-quarter earnings came in lower than analysts anticipated. Revenue and operating income were also lower than the forecasts from three analysts polled by FactSet. Supernus Pharmaceuticals — Shares popped as much as 5% after Supernus Pharmaceuticals announced results from a Phase 2a study of an antidepressant therapy that showed a “rapid and substantial decrease” in depressive symptoms. — CNBC’s Hakyung Kim and Sarah Min contributed reporting.
Check out the companies making the biggest moves midday: Taiwan Semiconductor — Shares surged 12% after the company, which is the world’s largest producer of advanced chips, reported a 54% gain in net profit for the third quarter driven by strong AI-related demand. Shares of chip giants Nvidia and Micron each rose about 3% in sympathy following the quarterly results. Nvidia — The AI-darling was up nearly 3% after hitting a record high earlier in the trading session. Taiwan Semiconductor, which is rallying on its earnings report, is a major Nvidia supplier. Expedia , Uber — Shares of the companies moved in opposite directions following a Financial Times report, which cited people familiar with the process, that Uber explored a potential takeover bid for Expedia. The paper said Uber’s interest in the online travel company was at a “very early stage.” Following the report, Expedia rose more than 3%, while Uber fell more than 2%. Elevance Health — The health insurer dropped 12% after reporting a profit of $8.37 per share for the third quarter, excluding items, while analysts polled by LSEG anticipated $9.66 a share. The company cited “unprecedented challenges” in the Medicaid business. However, Elevance saw $44.72 billion in revenue, above the consensus forecast of $43.37 billion. Travelers — Shares jumped 7.6% after the insurance company posted a big earnings beat before the bell. Travelers’ third-quarter earnings came in at $5.24 per share, topping the $3.55 a share expected from analysts polled by LSEG. However, revenue missed estimates. Lucid Group — The electric vehicle maker tumbled 15% after the company announced a public offering of almost 262.5 million shares of its common stock to raise $1.67 billion. Blackstone — The stock rallied nearly 7% on the back of the alternative asset managers’ financial report. Blackstone reported third-quarter earnings of $1.01 per share on revenue of $2.43 billion. Analysts polled by LSEG had expected EPS of 92 cents on revenue of $2.41 billion. CSX — Shares slipped 5.9% after the transportation company reported disappointing third-quarter results. CSX’s earnings were 46 cents per share on revenue of $3.62 billion. That’s below the consensus estimate of 48 cents per share and $3.67 billion in revenue, per LSEG. Nokia — U.S.-listed shares of the Finnish telecommunications giant fell 3% after the company posted an 8% dip in third quarter sales due to a slowdown in the Indian market. However, its quarterly profit increased 22%. Alcoa — The aluminum producer’s stock shed more than 3% after the company reported third-quarter revenue of $2.90 billion, below the $2.97 billion LSEG consensus estimate. However, its adjusted earnings of 57 cents per share topped the 28 cents a share expected from analysts. Equifax — Shares fell 2.6% after the company’s guidance fell short of expectations. Equifax expects fourth-quarter adjusted earnings per share between $2.08 and $2.18, versus the $2.20 a share estimate from analysts polled by FactSet. The company guided for full-year adjusted EPS between $7.25 and $7.35, short of the $7.36 consensus estimate. Revenue for both the fourth quarter and full year also came in below expectations. Steel Dynamics — The stock gained nearly 5% after the steel producer beat earnings and revenue expectations for the third quarter. For the period, Steel Dynamics posted earnings of $2.05 per share on $4.34 billion in revenue, above the $1.97 per share on $4.18 in revenue that analysts were expecting, according to LSEG. Looking toward 2025, the company said it expects steel pricing to recover. Synovus Financial — Shares popped 5% after the company reported better-than-expected adjusted earnings per share for the third quarter. Synovus also guided for fourth-quarter adjusted revenue of $560 million to $575 million, above the $558 million expected from analysts polled by FactSet. Walgreens Boots Alliance — The stock dropped about 5%, paring some of the 15.8% it gained in the prior session and now on pace for its worst day since Aug 27. On Wednesday, Walgreens reported a fourth-quarter earnings beat and said it plans to close about 1,200 stores over the next three years. — CNBC’s Sean Conlon, Hakyung Kim, Alex Harring and Pia Singh contributed reporting.
Check out the companies making headlines before the bell. Elevance Health – Shares plummeted more than 10% after the health insurer reported weaker-than-expected third-quarter earnings. In a statement , CEO Gail Boudreaux said the company remains “confident” amid “unprecedented challenges in the Medicaid business.” Health care stocks Molina Healthcare and Centene also fell nearly 9% and more than 7%, respectively. Taiwan Semiconductor – The stock surged more than 8% after the company reported a 54% gain in net profit for the third quarter. Shares of chip giant Nvidia – one of TSMC’s clients – rose more than 3% in sympathy following the quarterly results. Expedia – Shares jumped nearly 5% after The Financial Times reported, citing people familiar with the process, that Uber explored a potential takeover bid for the online travel company. According to Financial Times sources, Uber’s interest in Expedia was at an “early stage.” Uber shares fell more than 2%. Lucid Group – The stock tumbled 18% after the electric vehicle maker announced a public offering of nearly 262.5 million shares of its common stock. Lucid also said its majority stockholder, Saudi Arabia’s Public Investment Fund affiliate Ayar Third Investment, will purchase more than 374.7 million shares of its common stock. Nokia – Shares slid more than 5% after the company reported an 8% dip in sales for the third quarter, citing a slowdown in the Indian market. Nokia’s profit for the period, however, increased 22%. Looking ahead, CEO Pekka Lundmark said in a statement that he expects full-year profit to come in “within the bottom-half” of its guidance range. CSX – The transportation stock fell more than 4% following the company’s weaker-than-expected quarterly results. For the third quarter, CSX posted earnings of 46 cents per share on revenue of $3.62 billion. That’s below the 48 cents per share and $3.67 billion in revenue that analysts were expecting, per LSEG. Alcoa – Shares rallied nearly 7% following the aluminum producer’s earnings beat. Alcoa reported third-quarter adjusted earnings of 57 cents per share, versus the 28 cents a share expected from analysts polled by LSEG. However, revenue came in at $2.90 billion, below the $2.97 billion consensus estimate. Kinder Morgan – The energy infrastructure stock slipped 2.1% after third-quarter earnings missed analyst expectations. Kinder Morgan posted adjusted earnings per share of 25 cents on $3.70 billion in revenue. Analysts polled by LSEG had forecasted 27 cents a share and $3.98 billion, respectively. — CNBC’s Alex Harring and Michelle Fox Theobald contributed reporting.