Asia FX Talk - China stimulus disappointed markets

Ahead Today

G3: Japan Parliament vote on Prime Minister

Asia: Indonesia Consumer Confidence

Market Highlights

The Dollar strengthened and USDCNH rose to around 7.200, as the combination of better US data, the resumption of Trump trades, coupled with disappointment in China stimulus announcements weighed on Asian markets and currencies. In particular, Chinese authorities announced a scaled-up local government debt resolution programme, but did not immediately announce any direct stimulus to boost consumption spending, bank recapitalisation or property purchases post the National People’s Congress Standing Committee meeting. This was likely a disappointment relative to market expectations and China’s onshore equities fell and FX weakened.

Nonetheless, we would note some positives coming out of the NPCSC meeting, which in totality points to more supportive fiscal policy from China over the next 1-2 years. In particular China’s Finance Minister Lan Fo’an provided some forward guidance in fiscal policy. He pledged a more supportive fiscal policy for next year including increasing the deficit, further studying buying back housing inventory and idle land, supporting equipment upgrades and consumer goods trade-in, and ramping up central government transfers to local governments to increase social welfare spending. In addition, the announced local government debt swap of RMB10trn over 2024-28 is expected to save RMB600bn in interest costs, and may give local governments some fiscal breathing room and reduce some headwinds to growth at the margin.

Regional FX

With the Dollar strengthening, Asian currencies were also somewhat on the backfoot with SGD (-0.5%) and MYR (-0.3%) underperforming. Japan’s parliament is expected to vote this afternoon to elect a Prime Minister this afternoon, in a vote which is expected to keep Shigeru Ishiba in the job with the LDP as a minority government. Political support is likely to come from the Democratic Party for the People (DPP) in order to pass key legislation including the Budget, but with that is likely to also with more expansionary fiscal policy including on tax cuts. Meanwhile, China’s inflation numbers came in weaker than expected, with CPI at 0.3%yoy (vs consensus of 0.4%) and PPI at -2.9%yoy (vs consensus of -2.5%yoy), highlighting the underlying picture of still weak domestic demand in China.