China's Cutting Loose, Unveiling A Dramatic New Policy Change

What’s going on here?

The world’s second-biggest economy announced a plan to trim interest rates and increase spending next year.

What does this mean?

Call it the biggest shift in official Chinese financial policy in 14 years. Authorities say that starting now, the country’s central bank will be more willing to trim interest rates and slash the amount of money that commercial banks are required to hold in their reserves. That’s two big stimulus steps aimed at getting the country’s consumers and businesses borrowing, investing, and spending again. They also announced a plan to increase the government’s own spending to help bolster the sputtering economy. The hope is that the new flow of money will refuel growth and avoid a stubborn slide in prices.

Why should I care?

For markets: Short-term gains.

This wasn’t the first dose of stimulus China has announced lately: government spending and interest rate cuts unveiled back in September sparked a raucous rally in Chinese stocks. But that euphoria proved short-lived, and shares slumped on some second thoughts. The most recent reveal, which happened late Monday, boosted stocks with exposure to Chinese markets. Case in point: the Hang Seng China Enterprises Index, which tracks major Chinese companies listed in Hong Kong, ended the trading day 3.1% higher. That’s its biggest rise in almost two months. But, of course, there’s no telling whether this rally will last.

The bigger picture: Trade wars on the horizon.

China’s economy is expected to be under more pressure next year if the US imposes a 60% import tax on its goods, as feared. So it’s no wonder the country is looking to its consumers to pick up the spending slack. Still, investors aren’t yet convinced that any of this will be successful. Chinese stocks may trade relatively “cheap”, but traders will be looking for signs of an economic recovery before rushing in.

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