China rallies at the back of government intervention, raising hopes of a sustained turnaround. We think it’s a good step forward, but unlikely to be needle moving enough.
2 important events this week leading to a sharp rally in Chinese stocks, raising hopes of a China sustained turnaround.
- The PBoC held a press conference on 24 Sep to announce incremental measures to support and revitalize the economy.
- On 26 Sep, an off-schedule Politburo meeting chaired by President Xi set multiple economic objectives. The last two occasions of off-schedule meeting was March 2020 after the Covid outbreak and October 2018 during the US-China trade dispute.
While the market expected new measures to be introduced at some point given the state of the Chinese economy, the timing and magnitude came as a surprise to some extent. Overall, given how the market reacted, this exceeded market expectations.
The key debates now are: Will this be enough? Will the government continue to be proactive in tackling the structural issues the economy is facing?
Overall, I think this is a good step forward, but unlikely to be needle moving enough.
Here’s a recap and our take.
New policy package announced on 24 Sep followed by unusual Politburo meeting to discuss economic issues on 26 Sep
Stock Market: Improving risk appetite and liquidity in the market via swap facilities and stock special relending program.
One. Pledge by PBoC to support the stock market via setting up swap facilities so investors can obtain PBoC funding by pledging assets in order to obtain liquidity to buy stocks.
Two. Additionally, PBoC set up special relending facility for commercial banks to lend listed companies and controlling shareholders to conduct stock buybacks.
Skeptivest’s take: However, the pledged funds of CNY500b and CNY300b respectively represents only a small fraction (<2%) of China’s total listed onshore market cap. Therefore, it is arguable how needle moving this move will be.
Property Market: Easing refinancing stress on existing homes and reducing mortgage downpayment to increase appetite for new home purchases
One. 50bps rate cut for existing mortgages alongside lower downpayment ratio for second house purchase of 15% from 25%.
Two. Increase in funding support ratio from 60% to 100% for the PBoC’s CNY300b relending program for affordable housing.
Skeptivest’s take: Again, it’s arguable how needle moving this will be. Given the severity of the debt crisis in the Chinese property market, I doubt this rate cut will be enough to significantly revive confidence in the sector – neither for the Chinese to start buying houses nor debt ridden developers to pay off their debts.
Broader Economy: Step up in monetary policies to revive confidence
One. Policy rate cut. PBoC cut 7-day reverse repo rate by 20bps, which according to the Governor, will translate to 30bps and 20-25bps cut in medium-term facility and loan prime rate respectively. In other words, lower interest rates across the board for banks, corporates and households.
Two. Cutting reserve requirement ratio by 50bps soon, which is expected to release CNY1t of long-term liquidity in the banking system. Another 25-50bps cut in reserve requirement ratio is expected by end of 2024 alongside 10bp cut in 1Q25. In other words, banks will need to keep less of their deposits as reserves with PBoC and thus can lend out more.
Skeptivest’s take: Again, these are measures to pump money into system and increase liquidity. Just because there’s more money supply in the system, doesn’t mean that people will demand for it. Macroeconomic fundamentals drive investment (and thus borrowing) decisions. Deflation worries coupled with an overleveraged and downward spiralling property sector certainly don’t help with improving confidence to borrow and invest.
Broader Economy: More aggressive tone building up fiscal stimulus expectations
President Xi called for counter-cyclical fiscal stimulus, which raised market expectations of meaningful fiscal support. News about one-time cash allowance for those in extreme poverty alongside Shanghai government announcing a CNY500m services consumption coupon also boosted market expectation for further fiscal measures.
Moreover, the overall tone of the off-schedule Politburo meeting suggested that the economy was the priority – to “work to take the lead” instead of “prioritizing stability”.
Skeptivest’s take: The amount of cash handover is not disclosed, but unlikely to be extremely significant. For context, 40.4m people in China were covered by subsistence allowance as of November 2023. The allowance were around CNY615-779 per month per person. That’s around US$100ish. It’s hard to tell how big the fiscal stimulus package will be, so eyes on key upcoming events like the quarterly Politburo meeting in late October will be key.
