China Promises To Cut Taxes, Increase Spending To Stimulate Economy

China will cut taxes by $300 billion (or about 1.2% of GDP according to JPMorgan) in an effort to increase growth in a slowing economy, deputy central bank governor Zhu Hexin, assistant finance minister Xu Hongcai, and Lian Weiliang, vice chairman of the National Development and Reform Commission announced today. The government also said that it will increase spending this year and the People’s Bank promised to make monetary policy more forward looking with “reasonably ample” liquidity. The first of two cuts to reserve requirements at China’s banks went into effect today with the second cut expected on January 25.

Even though the Beijing government tried to temper enthusiasm–Premier Li Keqiang said that the government will not resort to a flood of stimulus–markets in China cheered. The Shanghai Composite index closed up 1.4%. As of noon New York time JD.Com (JD) was up 1.79%; Tencent Holding (TCEHY) was ahead 1.87%. Ctrip.Com International  (CTRP) gained 2.46%; and Alibaba Group Holding (BABA) was higher by 1.42%

The enthusiasm has also helped push U.S. stocks higher. The Standard & Poor’s 500 had gained 1.14% as of noon New York time and the Dow Jones Industrial Average was up 0.74%. The NASDAQ Composite led the way with a gain of 1.69% as technology shares responded strongly to the news from China. The small cap Russell 2000 increased 0.64%.

As you might expect on this news, the CBOE Volatility Index (VIX) fell as traders and investors decided they didn’t need to hedge risk. The VIX, sometimes known as the “fear index,” was down 4.25% to 18.26.

The upward move on the Chinas news has taken the S&P 500 above 2600, the level that some of us have been watching to see if this bounce has the legs to turn into a rally, to 2608.77. If the index can close above 2600 today, it will be one more indication that the bear has crawled back into its cave.

In other China news the South China Morning Post reported that five Chinese companies are expected to default on roughly $450 million worth of debt in coming days. Defaults in 2018 reached a record of $17 billion.