The latest Chinese NPC announcement has no direct impact on aggregate demand. The 10TN RMB (new 6TN RMB spread over 3 years+ 4TN RMB spread over 5 years) package is merely a debt swap. It might save a total of RMB600bn in interest payments for local governments. After swapping high-risk LGFV debt with risk-free government bonds, the swapped debt could be rolled over indefinitely, which could effectively prevent credit risk events. This result is clearly below previous market expectations (6tn local debt relief plus 4tn housing-related stimulus plus 2tn consumption-related stimulus) and has caused a sell-off in both domestic and HK stock markets. Chinese authorities do realize they may need a much larger stimulus to counter the impact on exports of higher US tariffs following Trump’s win. Hence we expect another stimulus announcement likely in the March annual meeting of NPC post clarity from Trump administration on tariffs. We continue to expect CNH depreciate towards 7.30 levels as markets price in a more elevated tariff structure in the beginning. Chinese equities might see global fund outflows as too much optimism has been priced in too soon. On global assets, yesterday’s announcement means a sell off in near term especially base metals & crude. This implies a +ve set up for rates globally in short term.
