Unleashing Consumer Growth with U.S.-Style Monetary Policies

While governments around the world can hardly be trusted, one thing we can count on is their willingness to print currency—especially when they are compelled to act. The structure of every modern economic system is such that political and economic policies will combat deflation at all costs if it appears (deflation is rare), because failure to do so would risk an economic and credit collapse. At the very least, modest inflation is a prerequisite for the stability of every modern economy.

With that said, in any occurrence of deflation, we can always “trust” that governments will print more money if necessary to address it. And China is no different. China is now compelled to act after a two plus year real estate slow down:

The Chinese government has just begun to adopt U.S.-style monetary policies similar to those the United States implemented after the housing crash of 2008/2009 to stave off deflation. The macro similarities are uncanny.

Like the U.S. from 2009 to 2018, the People’s Bank of China (PBOC) has substantial room to inject liquidity into the system and continue printing without significantly risking runaway inflation. China will likely have a soft real estate market for quite some time (similar to the U.S. after the Global Financial Crisis from 2009 to 2018). Moreover, just as in the U.S. after our real estate crash, China’s abundant energy policies will help keep consumer price inflation in check. With no risk of a housing melt up or extreme energy inflation in China, two huge drivers to keep street inflation in check, China has a lot of room do easing like the U.S. did with QE 1,2, 3 and portfolio balance channel.

So, the Chinese authorities are poised to print money, and they will continue to do so until deflation is eradicated. At the same time, they are embarking on policies aimed at creating a “wealth effect” to boost consumer confidence and stimulate more domestic consumption. In just a moment, we’ll discuss the levers they plan to pull.
Despite this wave of stimulus, the Chinese yuan may remain surprisingly strong against other currency exchange rates, just as the U.S. dollar did after the Great Financial Crisis, even with years of monetary easing. The BRICS+ countries have only gotten much tighter since the U.S. took $600 billion of Russian’s reserves out of our SWIFT system. China has very rich natural resource trading partners to boot.

A Massive Engine of Savings and Growth Potential

The Chinese consumer savings rate, as a percentage of GDP, has been historically high due to cultural factors and tradition. Currently, China’s savings rate as a percentage of GDP is at an astonishing 44%. This represents a massive economic engine that the Chinese government could tap into to boost the economy (for context, the U.S. savings rate is just 4% of GDP).

With consumer spending accounting for only 40% of GDP in China, and a consumer savings rate of 44%, there is substantial room for growth. China can transition from being primarily the “World’s Factory” to becoming a much larger, internally driven consumer economy. By comparison, U.S. consumer spending is 70% of GDP (with a much lower savings rate of 4%).

There is a large runway to unlock more Chinese consumption, and the People’s Bank of China has just begun implementing a multifaceted stimulus strategy to achieve this. This includes encouraging cash-rich Chinese companies to utilize their vast balance sheets for share buybacks, and providing swaps to financial institutions to signal that the government is fully committed to supporting the Chinese capital markets.

The U.S. Federal Reserve took similarly aggressive action to combat deflation from 2009 to 2018 (and again during the COVID-19 crisis in 2020), yet inflation remained low, while U.S. technology stocks absorbed the monetary base expansion due to their historically cheap valuations in 2010.

Similarly, just as U.S. internet stocks were emerging from a decade-long bear market in 2010, Chinese internet stocks are now emerging from a similar period from 2014 to 2024. The NASDAQ had a rough decade from 2000 to 2010, but leading companies grew revenues and earnings, eventually turning into cheap growth engines by 2010. Likewise, Chinese stocks have experienced a “lost decade” from 2014 to 2024, but leading Chinese companies have grown into extremely cheap and attractive valuations in 2024, which the Chinese government intends to leverage.

With well-planned energy policies, favorable energy trading partnerships, and a prolonged real estate slump, China is now embarking on U.S.-style monetary policies reminiscent of those implemented after the Great Financial Crisis in 2009. This should be highly favorable for the attractively priced growth companies in China. The similarities between the U.S. economy in 2010 and the Chinese economy in 2024 are truly striking.

While history doesn’t repeat, it often rhymes—and the parallels between the U.S. economy in 2010 and the Chinese economy in 2024 bode extremely well for those looking east.

Assets to Absorb the Monetary Base Expansion of China

Based on the dynamics discussed with the necessary Chinese stimulus, several assets will likely handsomely benefit from China’s stimulus measures and monetary policy strategies. Here are a few key themes for FMT to highlight:

1. Chinese Equities (Especially Tech and Consumer Sectors)
   • Rationale: Like the U.S. tech sector post-2009, Chinese internet and technology stocks are emerging from a “lost decade” and are trading at historically low valuations. The Chinese government’s efforts to boost domestic consumption and promote consumer confidence should favor companies in these sectors.
   • Potential Beneficiaries: Chinese e-commerce giants (e.g., Alibaba, JD.com, and Pinduoduo), fintech firms, and next-generation technology companies (e.g., Tencent and Baidu).
2. Consumer Discretionary and Retail Stocks
   • Rationale: Stimulus measures aimed at boosting local consumption, coupled with policies to create a wealth effect, should favor the consumer discretionary and retail sectors. As household confidence and spending power rise, sectors like travel, entertainment, and luxury goods could benefit.
   • Potential Beneficiaries: Retail brands, consumer services (e.g., Trip.com), and luxury goods companies with high exposure to the Chinese market.
3. Chinese Bonds and Fixed-Income Securities
   • Rationale: With China expected to embark on more monetary easing, the bond market could see increased capital flows. A strong yuan (like the U.S. dollar post-GFC) would make Chinese bonds attractive to foreign investors seeking yield. While interesting, FMT thinks Chinese bonds offer low convexity, but an increase in Chinese capital flows is even more hugely bullish the other assets listed above.
   • Potential Beneficiaries: Sovereign Chinese bonds, corporate bonds, and fixed-income ETFs focused on China.
4. Emerging Market and Asia-Pacific ETFs
   • Rationale: As China is a major component of many emerging market and Asia-Pacific indices, a broad-based recovery could lift regional ETFs and funds.
   • Potential Beneficiaries: ETFs like MSCI China ETF (MCHI), iShares China Large-Cap ETF (FXI), and other Asia-Pacific-focused funds.
5. Gold and Precious Metals
   • Rationale: Bitcoin is prohibited in China. But with a savings mentality in China, savers will seek assets that act as a hedge against potential local currency volatility or longer-term inflation. Precious metals are a fan favorite of the Chinese.
   • Potential Beneficiaries: Gold, silver, and precious metal mining companies.

Overall, Chinese technology and consumer stocks appear to be particularly well-positioned, considering their valuation, growth potential, balance sheets, and alignment with government policy objectives. I am mostly focused on these areas, and we’ll keep our hard earned money in very liquid vehicles should anything arise out of Taiwan.

However, I think Taiwan friction is a low probability in the intermediate term because China will want to welcome capital as they print their way out of their real estate slump that is about two years old now. Incidentally, it was about two years after the GFC in the United States that U.S. Internet companies also emerged as the market leaders!

To sum up, FMT is bullish on Chinese stocks over the next few years, and asset leadership around various countries is undergoing a large shift.

The U.S. needs to shore up its energy requirements over the next few years to meet the demands of Artificial Intelligence, and an end to U.S. Shale growth (commodities are slowly taking the leadership away from market indices in the U.S.), and international equities likely outperform U.S. equities after a long period of underperformance.

FMT is long well positioned North American energy themes, international equities, bitcoin, gold, silver, and outliers.