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Chinese markets welcomed the “unprecedented” measures pledged by Beijing with the aim of stabilizing financial markets, providing strong momentum and enhancing risk appetite, but are these measures sufficient to stimulate the faltering real economy?
The People’s Bank of China announced the allocation of 800 billion yuan ($114 billion) to support the stock market, by lending to asset managers, insurance companies and brokers to buy shares, and granting listed companies loans to buy back shares.
Central Bank Governor Pan Gongxing explained during a press conference with financial regulators that this is the first time that the People’s Bank of China has “innovated” such types of monetary policy tools and used them to support financial markets. He pointed out that the allocated funds may increase by two or three times if the plans prove effective. The idea of establishing a “Stock Stabilization Fund” was also raised, but not enough details were provided.
These measures are among the largest moves taken by the People’s Bank of China towards Chinese stock markets, which have witnessed a sharp decline over the past four years, reflecting a strong decline in confidence in the country’s economy.
Following the announcement, China’s CSI 300 index – which includes stocks listed in Shanghai and Shenzhen – rose by 4.3%, recording its best performance since July 2020, after witnessing a decline of more than 40% since 2021. On Wednesday, stocks witnessed a broad rise, and she added 2.1%, while the value of the renminbi rose by 0.5% against the dollar, reaching just over 7.01, its highest level in more than a year.
Loan programs designed to support stocks were among several stimulus measures announced by the People’s Bank of China, including lowering the benchmark interest rate, mortgage rates, and down payment requirements. These steps came after the US Federal Reserve cut interest rates by 50 basis points this week. The past, which gave the central bank more room to maneuver.
“These measures exceeded market expectations,” said Ding Shuang, chief economist at Standard Chartered for Greater China and North Asia. “It may represent the beginning of bolder policy measures compared to previous measures when complaints were raised about piecemeal policy responses,” but he added, “We still need to look at the scale and impact of these plans to assess their impact on the market.”
“These are some new ideas, especially around lending and swap facilities,” said Jason Lowe, head of Asia Pacific equity and derivatives strategy at BNP Paribas. The new swap mechanism allows non-banking financial companies to borrow from the People’s Bank of China to buy stocks, where bonds, stocks or ETFs can be provided as collateral. The re-lending program also provides low-interest loans to commercial banks, which can then lend to companies that wish to finance… Stock buybacks as a way to enhance the values of their shares. Economists have suggested the incentives to buy shares are aimed at expanding share ownership away from the so-called “national team” of state-backed financial institutions, which bought billions of dollars of Chinese-listed stocks earlier this year in a bid to boost market performance.
During a press conference, Wu Qing, head of the market supervisory authority, the China Securities Regulatory Commission, said that by the end of August, institutional investors had increased their share of free trading shares in domestic stocks listed on the mainland from 17% to 22.2% compared to 2019. However, he pointed out the lack of funds in the medium and term within the market, as the rapid movements of deposits from individual investors greatly affect stock sentiment.
“The essence of these programs is aimed at stimulating other financial institutions that are currently hesitant to increase their allocations to stocks,” said Lowe of BNP Paribas.
Ding Shuang explained, “It depends on whether the funds are willing to borrow from the People’s Bank of China to buy shares and accept responsibility for any losses if their value decreases.” Beijing considers the stock market a clear indicator of the strength of the economy and an important tool for maintaining social stability.
Morgan Stanley analysts reported that the stimulus was equivalent to 3% of the total free shares traded on the Chinese domestic stock market, and described the measures as “a completely positive step.” However, they warned that the new measures would not be sufficient for the overall recovery of the Chinese economy, and stated that “the sustainability of improved market sentiment and the long-term recovery path depends largely on the overall economic recovery and stable corporate profit growth.”
Economists noted that the announced stimulus measures were important, especially with regard to the simultaneous reductions in the benchmark interest rate and the reserve requirement ratio for banks, which is the amount of reserves that lenders must maintain, and Ban indicated that reducing the ratio by 0.5 percentage points, would pump One trillion Chinese yuan in liquidity alone.
China also announced a 0.3 percentage point cut in its one-year medium-term lending facility, affecting the banking sector’s liquidity. However, most analysts suggested that a massive fiscal stimulus, aimed at ending China’s prolonged real estate slump and providing direct benefits to households, would help boost confidence and rein in the recession. The People’s Bank of China announced measures that would actually lower interest rates on a plan With a value of 300 billion yuan to buy unsold properties, but the program has had difficulty being implemented on the ground.
Robert Gilhooly, chief emerging markets economist at Aberdeen, said the interest rate cut for existing mortgage holders announced on Tuesday was “the closest thing to a household transfer”, but ultimately the government will have to step in and provide more funding. The government will save the real estate sector, or household spending will likely remain “constrained by the negative wealth impact resulting from declining real estate values and a weak labor market.”
