Finance
China’s Ministry of Finance tackles debt problems before economic challenges
The 597-meter high Goldin Finance 117 Tower in Tianjin, China, started construction in September 2008, but still stands unfinished in this picture, taken Aug. 28, 2024.
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BEIJING — China’s Ministry of Finance press briefing over the weekend underscored how it is focused on tackling local government debt problems, instead of the stimulus markets have been waiting for.
In his opening remarks on Saturday, Minister of Finance Lan Fo’an laid out four measures, starting with increasing support for local governments in resolving debt risks. It was only after he outlined those four points that Lan teased that the country was looking to increase debt and the deficit.
“The press conference is consistent with our view that addressing local government financing struggles is a priority,” Robin Xing, chief China economist at Morgan Stanley, and his team said in a report Sunday. They also expect that the central government will play a larger role in debt restructuring and housing market stabilization.
“However, we believe upsizing consumption support and social welfare spending will likely remain gradual,” the Morgan Stanley analysts said.
China’s real estate market slump has cut into a significant source of revenue for local governments, many of which struggled financially even before needing to spend on Covid-19 measures. Meanwhile, lackluster consumption and slow growth overall have multiplied calls for more fiscal stimulus.
The four policies announced by the Ministry of Finance are focused more on tackling structural issues, Chinese economic think tank CF40 said in a report Saturday.
“They are not specifically aimed at addressing macroeconomic issues such as insufficient aggregate demand or declining price levels through Keynesian-style fiscal expansion,” the report said, in reference to expectations of greater government intervention.
CF40 estimates China does not need additional fiscal funding to achieve the full-year growth target of around 5%, as long as the spending that it has already announced happens by the end of the year.
Local governments drag on domestic demand
Finance Minister Lan on Saturday did say the central government would allow local governments to use 400 billion yuan ($56.54 billion) in bonds to support spending on payroll and basic services.
He added that a large plan to address local governments’ hidden debt would be announced in the near future, without specifying when. Lan claimed that hidden debt levels at the end of 2023 were half what they were in 2018.
Historically, local governments were responsible for more than 85% of expenditure but only received about 60% of tax revenue, Rhodium Group said in 2021.
Constrained local government finances have “contributed to the downward pressure on prices,” the International Monetary Fund said in an Aug. 30 report on China.
The core consumer price index, which strips out more volatile food and energy prices, rose by 0.1% in September, compared to a year ago. That’s the slowest since February 2021, according to the Wind Information database.
To Morgan Stanley, resolving local government debt problems is a “critical step” toward halting the declining trend of prices — almost just as important as stimulus directed at boosting demand.
Waiting for another meeting
After a flurry of policy announcements in the last few weeks, investors are looking ahead to a meeting of China’s parliament, expected at end of the month. China’s legal process requires it to approval national budget changes. The meeting last year, which ended on Oct. 24, oversaw a rare increase in the fiscal deficit to 3.8%, from 3%, according to state media.
Analysts are divided over the specific amount of fiscal support that is needed, if any.
“Whether it’s 2 trillion [yuan] or 10 trillion, for us, it actually doesn’t make so much of a difference,” Vikas Pershad, fund manager at M&G Investments, said Monday on CNBC’s “Squawk Box Asia.” “Our bet on China is a multi-year bet. The Chinese equities are too low in valuation.”
He emphasized the policy direction is “on the right path,” regardless of the stimulus size.
Pershad has talked about buying opportunities in Chinese stocks since January but he said Monday that the latest flurry of activity from the region hasn’t made him any more active in the sector.
China’s policymakers have generally remained conservative. Beijing did not hand out cash to consumers after the pandemic, unlike Hong Kong or the U.S.
Julian Evans-Pritchard, head of China economics at Capital Economics, said at least 2.5 trillion yuan of additional funding is needed to keep growth around 5% this year and next.
“Anything less than that, and I think the risk really is the economy just continues to slow next year given all the structural headwinds that it faces,” he said Monday on CNBC’s “Squawk Box Asia.”
Evans-Pritchard insisted that fiscal policy is more critical for addressing the latest economic slump since China’s other support tools have previously included real estate and credit, which are not as effective this time.
“It’s hard to put a specific number on it because obviously there’s a lot of talk of recapitalizing the banks, dealing with the existing debt problems among the local governments,” he said. “If a lot of the additional borrowing goes into those areas it actually does not stimulate current demand that significantly.”
— CNBC’s Sonia Heng contributed to this report.
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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