China's $113-Billion Stimulus Adds To Global Liquidity Tsunami

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Cliff-Notes:

• China's central bank introduced its most aggressive stimulus in 4 years, including a 20 bps cut to the 7D reverse repo rate, a 50 bps reduction in the Reserve Requirement Ratio, and an 800 billion yuan facility for financial institutions to buy stocks.
• Despite the stimulus, China's economic challenges remain deep-rooted, with companies overloaded with debt; additional fiscal measures and government spending will be necessary to truly boost economic activity.
• Commodity prices surged in response to China's stimulus, with WTI and Brent crude oil up 1.6% and copper up 3.19%, signaling supportive conditions for global growth heading into Q4.

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China's central bank unveiled its most aggressive stimulus package in 4 years in an attempt to jumpstart its dismal economic activity. The comprehensive monetary stimulus package includes:

• Lowering the 7D reverse repo rate by 20 bps from 1.7% to 1.5%
• Lowering the Reserve Requirement Ratio by 50 bps, unleashing 1 trillion yuan in liquidity
• Minimum down-payment ratio cut to 15% for second-home buyers
• 800 billion yuan liquidity facility for financial institutions to buy Chinese stocks

More will need to be done on the fiscal side in order to actually jumpstart economic activity. China has a balance sheet problem, not a credit one, so lowering rates will not incentivize companies to borrow and spend. The problem is that companies are overloaded with debt. China will have to take more direct fiscal measures and ramp up government spending into the private sector to really stimulate economic growth.

Nevertheless, the Shanghai SE Composite rallied for its second day in a row, closing 4.66% higher than Monday in its largest rally since June of 2020 during the massive financial easing that happened during China's strict COVID lockdowns. The announcement of its unorthodox and extremely supportive stock purchasing facility for eligible financial institutions has been met with a great response from investors in Chinese equity markets, signaling renewed confidence that the PBOC is committed to long-term support:

The biggest part of this stimulus package is the 800 billion yuan ($113 billion) facility that will let financial institutions borrow money from the central bank to buy Chinese stocks.

Previous attempts at intervention from the PBOC in the Chinese stock market have failed. There have been $80 billion in net ETF purchases using state funds in 2024, and the CSI 300 has been flat or down despite this explicit government support.

The PBOC creating this facility for financial institutions to buy stocks will likely result in renewed sentiment toward China's beaten-down equity market (as observed in the last 2 days of positive price action), as opposed to China buying ETFs directly off of the market which was seen as desperate and lackluster:

Manufacturing is 26.18% of China's GDP which is more than double the percentage of US GDP made up by manufacturing at 10.3%. As a result, when China announces and performs liquidity operations to spur its economic activity, commodity prices respond with high sensitivity.

That's what was witnessed in yesterday's price action—commodities ripped off of the news. WTI and Brent crude oil were both up 1.6% on the day, and Copper—a bellwether for the direction of global economic activity—was up 3.19%. As more than 50% of major central banks ease monetary policy in tandem, conditions for growth are increasingly supportive heading into Q4.

What's my read on this?

Commodity prices surging off of China's stimulus plan paired with rebounding growth in the United States and stabilizing economies in Europe may accelerate growth and inflation more than the Fed anticipated. Gold is up 4% and 10y US Treasury yields are up 14 bps since the Fed cut rates last Wednesday—the market is pricing in rebounding growth and inflation risk. For now, at least. Data can change, and markets will discount that data as it changes.

While growth is certainly slowing down, we are not yet in a recession. Consumers are starting to feel more uneasy about the economy and their future economic outlook, confirmed by today's worse-than-expected consumer confidence print: down from 103.3 to 98.7 versus an expected rise to 104.

Recession risks will continue to rise as the Fed's 5.5% policy rates from the past year continue being digested by businesses in the present—remember: the Fed's monetary policy works with long and variable lags.

This also means that the Fed's current rate cuts aren't going to have an immediate economic impact, but will rather be felt several months down the line.

Gold has been melting up for several weeks now, up 5.75% this month and breaking new all-time highs every day. This is gold's best YTD performance of this century. Still, it's only up 29% compared to bitcoin's 47% YTD rally:

Bitcoin is the world's best proxy for the global money supply. With liquidity slated to rise as global central banks lower interest rates and balance sheet capacity at financial institutions expands as a result of that easing, bitcoin will be the best asset to position yourself in to capture the upside gains to be made in this liquidity expansion phase over the next 18-24 months.

Bitcoin responds to moves in global M2 with roughly ~36x sensitivity; i.e. an increase in YoY % growth in M2 from 4% to 5% will be met with an increase in YoY % growth for Bitcoin from 145% to 181%:

TLDR; growth and inflation risks are rearing their head, and markets are pricing themselves accordingly. Time will tell if this trend remains intact or if labor and consumption data take a drastic turn for the worse in the coming weeks.

Take it easy,

Joe Consorti

Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.

Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.

Download Theya on the App Store.