China’s National People’s Congress approved an increase in local government debt limits by 6 trillion yuan, to be distributed in three phases for the replacement of existing implicit debt. Starting in 2024, an additional 800 billion yuan annually will be allocated from new local government special bonds for five years, amounting to a total of 4 trillion yuan, or a cumulative 10 trillion yuan in debt restructuring. While the scale is indeed “large” as advertised, market reactions have been less optimistic. For instance, bond markets accelerated long-term bond purchases, the FTSE A50 futures saw a short-term dip, and the RMB to USD exchange rate also underwent a substantial short-term adjustment. This suggests that the market may face challenges in maintaining optimism next week. Here are several reasons why the 10-trillion debt restructuring plan is being met with such a reaction:
1. Timing and Scale: Dissecting the plan reveals that only 2.8 trillion yuan is expected to be allocated in the coming year, which differs from the market’s expectation of a one-off 10 trillion yuan injection. Market anticipation was for a framework involving a single 10-trillion package—6 trillion for debt restructuring and 4 trillion for strategic reserves. The 2.8 trillion yuan annually falls short of those expectations.
2. Lack of Real Estate-Specific Policies: The meeting did not specify any funding earmarked for purchasing existing housing inventory, which would entail practical challenges. While local governments might be motivated to issue bonds to pay off debt, they lack the same incentive to issue bonds for purchasing housing inventory due to limited qualifying projects, low rental yields, and high administrative costs. Therefore, this initiative would either require subsidies from the central government or direct funding, neither of which were clearly addressed at the meeting, potentially contributing to a negative outlook for the real estate sector.
3. No Large-Scale New Policies Before the December Economic Work Conference: Until the end of the year, there are unlikely to be new large-scale policy measures, though monetary policy may ramp up in response to underwhelming economic policy results, potentially driving up bond prices further.
With this, the suite of incremental policies from the September 26 meeting has been fully disclosed. Although the announced 10 trillion debt restructuring tool does meet fiscal expansion, it differs fundamentally from the anticipated stimulus. This plan is debt-focused, maintaining overall debt levels rather than stimulating structural reform or significant economic adjustments, which continue to lean heavily on infrastructure investment. Recent central bank actions, such as reverse repo to manage liquidity, suggest limited space for aggressive monetary stimulus. Last week, we outlined three economic stimulus proposals, none of which have materialized, and as expectations subside, capital markets may shift away from the recent “meeting-trade” mindset, refocusing on core macroeconomic data.
This week, as the U.S. election concluded with Trump’s victory, the Fed cut interest rates by 25 basis points as expected. Global equity markets responded positively, though gold saw a notable retreat. The election surprise came as Trump not only won the presidency but also secured a Republican majority in both houses, a development that eased the path for economic policies. The U.S. 10-year Treasury yield exceeded 4.4%, with markets perceiving Trump’s policies as growth-friendly. The dollar index peaked at 105 but showed little upward momentum thereafter, reflecting expectations that Trump’s trade policies may be relatively moderate due to Musk’s influential role as a potential variable. Trump is likely to see tariffs as necessary leverage to encourage overseas capital and manufacturing to return, with potential temporary exemptions.
The Fed’s rate cut of 25 basis points did not prompt major adjustments in the dollar index or Treasury yields, indicating that it was well-anticipated and that concerns over the Fed’s pace of easing are subsiding. The next key question for global markets is identifying factors that might trigger a correction in U.S. equity markets. Following substantial rallies, slight pullbacks are conceivable, but potential major risks include:
1. Upcoming U.S. Inflation Data Prior to the December FOMC Meeting
2. Corporate Earnings, Especially in AI Sectors Falling Short of Expectations
3. Geopolitical Tensions
Strategy Outlook: Next week, we anticipate a modest uptrend in the Nasdaq. Gold’s upward momentum remains constrained, largely due to geopolitical factors, with the Russia-Ukraine conflict at a critical juncture. U.S.-Russia negotiations could increase global gold supply while dampening demand. In crypto, Trump’s victory has lifted the perceived ceiling, though we expect a volatile upward trajectory.