What happened
Several Chinese stocks moved higher today after China's central bank unexpectedly lowered one of its key interest rates, leading investors to believe that more stimulus could be on the horizon.
Shares of the large Chinese tech conglomerate Alibaba (BABA 0.59%) were trading more than 2% higher today at 11:15 a.m. ET. Meanwhile, shares of the video-sharing company Bilibili (BILI 4.96%) traded more than 4% higher, while shares of the Chinese tech and search engine Baidu (BIDU 0.62%) were up more than 6%.
Now what
The People's Bank of China surprised the market today when it trimmed its seven-day reverse repo rate, a peg for short-term liquidity needs, from 2% to 1.9%. Central banks trim rates when they want to stimulate the economy because it makes borrowing cheaper and therefore more enticing. While a cut like this is nothing monumental, it's likely fueling excitement among investors that stimulus could be coming.
Image source: Getty Images.
Bloomberg also reported that the Chinese government is considering a range of other stimulus measures to help the country's real estate sector as well as broader demand in the country. Economists at Goldman Sachs think China's central bank is poised to conduct further rate cuts later this year. The bank also expects that banks in the country may eventually get some relief and that the government could reduce bank reserve requirements by a quarter point, which would provide some capital relief to Chinese banks that they could then use for lending.
Most economists and analysts expected China's economy to have a big year in 2023 after easing "zero-COVID" policies, which really cut into growth last year. China's economy did grow by 4.5% in the first quarter, but other economic data of late has been mixed, suggesting the rebound could be losing momentum.
However, the government's stimulus could be more muted than in the past, according to Nomura Holdings' chief China economist, Lu Ting, who said high debt levels in China are a reason it "will be more difficult to roll out a support policy package."
"The room for traditional stimulus tools is increasingly small, and they have led to lingering negative impact in the past, including high local government debt, inefficient investment and resources being wasted," Ting added.
In other news, tech stocks in general are moving higher today after consumer prices in the U.S. rose 0.1% in May, which is in line with estimates. The Consumer Price Index was up only 4% year over year, which is the lowest annual number for inflation in two years. Traders are now firmly betting that the Fed will leave interest rates unchanged when it concludes its June meeting tomorrow.
Now what
While stimulus should aid Chinese stocks, it's a little disappointing to see China's economic recovery already potentially petering out, although perhaps it will bounce back later this year. What would really help China's economy is if the government could solve some of the problems in the real estate sector by increasing confidence in builders' ability to finish developments.
Ultimately, of these three names, I like Alibaba and Baidu the best. These are giant companies at the forefront of technology in a country that is among the top innovators in the world. I think this gives both the ability to be long-term winners.
