China's central bank announced a stimulus package on Tuesday. The stimulus includes increased funding and reduced interest rates, representing a fresh effort by policymakers to bolster confidence in the world's second-largest economy following a series of discouraging economic reports that have sparked fears of a lasting structural decline.
In response to the central bank's actions, Chinese stocks and bonds surged. Governor Pan Gongsheng's announcement of measures to reduce borrowing costs, inject liquidity into the economy, and alleviate household mortgage payments led to the Yuan currency's rise to a 16-month high against the dollar.
USD CNY Exchange Rate (white) vs. China's 10 Year Government Bond Yield (blue)
This, in turn, may have attracted foreign capital back into Chinese markets. The feedback on this stimulus plan, however, is still mixed: some deem the stimulus too small, while others see it as a good start. In our view, it still won't suffice to attract global money flow in a significant way
Despite Sanghai Composite Index success story to reverse the previous 1 month loss in just 3 days, we have doubts on the continuation of the rally. As previously mentioned, some have expressed doubts about the effectiveness of the People's Bank of China's liquidity injections due to the current lack of credit demand from both businesses and consumers. Aside from that, we also see that investors might still have cold feet from possible capital control in the future.
Shanghai Composite Index Performance (as of September 25th - 15.40, GMT+7)
Having said that, Indonesia's macroeconomic backdrop remains strong as evidenced by the continued appreciation of the rupiah against the US dollar, despite temporary outflows. This continuous Rupiah appreciation we believe is likely to offset the lack of EPS growth in Indonesia.
USD IDR Exchange Rate 1 Week Performance
With that, we believe this presents another opportunity served on a silver platter. Therefore, we suggest investor to add more weight periodically should the market decline further as we consider the strengthening of Rupiah. In our view, it won't really matter what stock to buy, the size of the inflow will be much bigger than the size of JCI. What important is that to remain heavily invested as we welcome the tsunami of inflow.
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