Ajay Rajadhyaksha: Welcome to The Flip Side. I am Ajay Rajadhyaksha, Global Chairman of Research at Barclays, and I'm joined today by Kaan Singh, our head of Asia cross-asset strategy. We're going to discuss the remarkable Chinese turnaround of the last few weeks, whether new stimulus is a game changer or just window dressing. I keep getting asked, are we finally entering the year of the Dragon? Economically, that is.

Kaan Singh: Thanks, Ajay. And well, at least markets have certainly seen an astonishing change, right? Since mid-September, the Shanghai Composite Index, China's benchmark, is up a staggering 35%. The Hong Kong exchange is up 30% in the last month. And that's all while the S&P and Nasdaq are flat for the period. I'm really running out of adjectives to describe this move.

Ajay Rajadhyaksha: Yeah, I hear you, Kaan. I'm just wary that all of this excitement fizzles out if the economy disappoints. I think you will admit that the Chinese economy has disappointed all year.

Kaan Singh: Yeah, I think that's fair. Earlier home prices in China have been falling, households have pulled back on spending, and the country has really struggled with deflation. The only part of the economy that is holding up is the export sector.

Ajay Rajadhyaksha: And even that's looking shaky now, isn't it, as the chance of US tariffs rises as Europe starts slapping tariffs on Chinese car exports. You saw the August data. Everything in the economy was slowing hard. The stock market kept dropping, dropping, dropping. They had to take action.

Kaan Singh: Well, Ajay, a lot of clients believe that China would wait to know the results of the US election before unleashing any big round of stimulus, but I guess I agree. They clearly felt that they couldn't just wait till after the elections, even if it was just one month out.

Ajay Rajadhyaksha: And as I see it, and tell me if you disagree, but I think the recent actions seem to fall into three categories. First, the central bank cut interest rates, established a lending facility to buy stocks. Second, they cut the mortgage rate, reduced down payment requirements, all to boost demand for homes. And finally, they announced that the government will issue an extra $2 trillion renminbi. That's the fiscal stimulus. But that's still less than $300 billion. It just doesn't seem like enough to get an $18 trillion economy moving.

Kaan Singh: Yeah, that's right. But Ajay, you are missing a few things. First, there are media reports that China will recapitalize its banks with $140 billion USD in capital. Second, and I guess this is the spicier one, a number of leading policymakers have called for China to do a total of ¥10 trillion in total stimulus, which is almost $1.5 trillion USD. So yes, $300 billion USD is not enough, but $1.5 trillion likely will be to turn things around.

Ajay Rajadhyaksha: Yeah, but that's just it, Kaan. These are all media reports, vague calls for the future. The actual amount of money they have committed to spending is really not very much. I feel like that football player in Jerry Maguire. Someone needs to show me the money.

Kaan Singh: Okay. Jerry Maguire is old now, Ajay. You really have to let go. But jokes apart. Remember China's Covid policy? Months and months of harsh lockdowns even after the rest of the world had opened up. And then in November 2022, they do a complete about turn. They stop all lockdowns, bite the bullet and throw everything open. That is kind of what this month feels like to me, is just a complete about turn in policy. If I'm right, I don't see how they stop at announcing just ¥2 trillion. It's got to be much, much bigger.

Ajay Rajadhyaksha: Say you are right, they do over $1 trillion in stimulus, around five, 6% of GDP. Even with that, isn't it true that they're past stimulus rounds, the ones in 2009 and 2010, the one in 2015 and 2016, those were still immensely bigger. I mean, 2009, 2010, China famously poured 50% more concrete in just two years than the United States did across the 20th century. That's fiscal stimulus. Even $1 trillion this time pales in comparison, doesn't it?

Kaan Singh: True. That's right. Past rounds of stimulus have, of course, been far bigger. But no one is expecting China to grow at nine and 10% anymore. The hope is that they finally do enough stimulus to resume, growing at around 5% in the best-case scenario.

Ajay Rajadhyaksha: Even there, Kaan, there's this issue of diminishing marginal utility when it comes to new stimulus. I keep thinking, how much longer can China keep throwing new money to boost growth? How much more manufacturing capacity can one country build? I mean, remember, this is a highly indebted country. When you factor in households, corporates, local governments, state owned firms, etc. That's why China did very little stimulus during Covid. They were already full up even as the West was remembered spending money hand over fist. And now you think they will do an extra trillion dollars or more?

Kaan Singh: I do think this time is different, Ajay. For the first time, China seems willing to give money outright to its consumers. I think that's quite important from a policy standpoint. So far, the approach has been what you said, invest more in manufacturing capacity or infrastructure, or so to speak, the old playbook of China stimulus. But they finally realized that their problem is that their consumers are just not spending enough. They just don't have confidence. And they are taking steps to remedy that. Right. Like cash handouts by big cities like Shanghai, consumption vouchers by the Ministry of Finance. It all kind of seems to be moving in the right direction.

Ajay Rajadhyaksha: Well, if they're going in the right direction, they are still doing it very slowly. Can those cash handouts that you mentioned so far, there's only been a few billion at most. In fact, I would argue that even the stimulus that they have announced so far, the two trillion renminbi or $300 billion even, that's a little flaky. They've said that gross, not net borrowing, will rise by that amount. But remember, some of that debt is coming due. So gross issuance was always going to rise a lot in the next 12 months. They might not even be doing that extra $300 billion that everyone's excited about. And speaking of excited, I keep getting asked by clients about the impact new China stimulus will have on the rest of the world, and I keep answering that. It's minimal. No massive increase to global growth, no commodity super cycle. This is nothing like what happened in 2009, 2010 or 2016, 2017.

Kaan Singh: Yeah, I do agree with that, Ajay. First, no one is talking about them growing near the levels of past cycles. Also, the stimulus is more inward focused. It won't be about China buying massive amounts of raw materials or building new manufacturing plants like we've seen in past cycles. It's about China really encouraging its consumers to spend more money, especially on services within the country. So yes, I think the spillover for the world is pretty limited. But Ajay, if you were to change gears a little here, if you're skeptical about an economic turnaround, are you also skeptical about the China equity rally so far because the stock market surely is quite excited?

Ajay Rajadhyaksha: No, I think you're right. I think the stock market rally is justified. China equity sentiment was so depressed that all you needed for a rally was a sign that authorities were moving in the right direction. Finally, and I think you got that the Chinese central bank is now allowing you to borrow from them to go buy stocks. They are cutting interest rates sharply. They are talking about a stock stabilization fund. So yes, all of this does justify the rally so far.

Kaan Singh: And there's a lot more. Right, Ajay? There's also a strong household reallocation story at play here. So for the last several years, as Chinese households have socked away trillions of dollars in savings, and typically these savings would have flown into the housing sector. But instead, this money has been stuck in bank deposits, and now even bank deposit rates are being cut. So, some of this saving could and should technically find its way into the stock market. Even now, Chinese stocks are still magnitudes cheaper than the Indian equity market, for example. But if you are right that the overall fiscal stimulus will ultimately be very small, then are you also saying that the equity rally will eventually fizzle out?

Ajay Rajadhyaksha: No, I wouldn't go that far, Kaan. You noted this, Chinese stocks are still very cheap, even with earnings depressed by weak growth. And that equity market is famously momentum driven. When it rises, it keeps rising. From June 2014 to June 2015, for example, Chinese stocks went up 250% in one year. And I don't remember the economy doing anything exceptional that year. It's just a momentum driven market.

Kaan Singh: Well, Ajay, for someone who's been quite bullish Chinese stocks, I don't love that example because what you didn't mention is that after June 2015, Chinese stocks fell 40% in the next two months. And even today, a decade later, the Shanghai index is far below the levels of 2015. Please tell me that's not what you were implying.

Ajay Rajadhyaksha: No, no, no, that's not what I'm saying. And I would not position against Chinese stocks at these levels. Look, all I'm saying is that what they have actually announced in stimulus is pretty small. What is being called for? The extent to which expectations have risen is pretty large. And so far, all we've had is mostly words. And remember, there have been a number of Chinese stimulus measures in the past few years, and so far, they have all disappointed.

Kaan Singh: Ajay, I guess I'm going to say the four most dangerous words in finance. I do think this time is different, and I think they have done a complete about turn in policy, they will announce more stimulus measures to come, especially as we head into two important events in October, and I think it will be a lot more. They seem genuinely committed to getting the economy moving again, and they finally seem to acknowledge that they need to help their consumer. So yes, I'm pretty optimistic right now.

Ajay Rajadhyaksha: Well, I hope you are right and I'm wrong because very weak growth in China does pose problems for the global economy. So if you're right, global growth is about to get a bit of a lift. I guess I'll believe it when I see it, but we will see what happens in the weeks to come. For now, our readers can get our latest thoughts in our recent piece titled, China Stimulus: This Could Be Big, available to our clients on Barclays Live.