Chinese markets have briefly responded positively to the introduction of an “unprecedented” set of measures promised by Beijing aimed at stabilizing capital markets and reviving investor confidence. However, there remains significant concern about the effectiveness of these measures in stimulating the broader, faltering real economy.
On Tuesday, the People’s Bank of China (PBoC) unveiled an Rmb800bn ($114bn) initiative designed to bolster the stock market. This initiative involves lending to asset managers, insurers, brokers to purchase equities, and to listed companies to enable stock buybacks.
This marks the first time the PBoC has employed such monetary policy tools specifically to support capital markets, according to central bank governor Pan Gongsheng, who made the announcement alongside financial regulators. The allocated funds have the potential to be increased significantly if the initial schemes prove effective. Additionally, policymakers discussed the creation of a “stock stabilization fund,” though specifics were not provided.
These measures represent one of the most substantial efforts by the PBoC to support China’s equity markets, which have seen a decline over the past four years due to waning confidence in the economy. Following the announcement, China’s CSI 300 index of shares listed in Shanghai and Shenzhen climbed 4.3%, achieving its best performance since July 2020. The rally extended into Wednesday, with the index rising an additional 2.1%, while the renminbi appreciated by 0.5% against the dollar, reaching approximately 7.01, its highest level in over a year.
The PBoC’s strategy includes loan programs among a broader set of stimulus measures which encompass reductions in the benchmark interest rate, mortgage rates, and downpayment requirements. These moves follow a significant 50 basis point rate cut by the US Federal Reserve the previous week, which provided the PBoC with additional maneuvering room.
Ding Shuang, chief economist for greater China and north Asia at Standard Chartered, noted that these measures exceeded market expectations and potentially signal the beginning of more forceful policy actions compared to the past. He stressed, however, that the true impact on the market would depend on the size and uptake of these programs.
Jason Lui, head of Asia-Pacific equities and derivatives strategy at BNP Paribas, highlighted the novelty of some ideas, especially regarding the lending and swap facilities. The new swap tool allows non-bank financial firms to borrow from the PBoC to buy equities, using bonds, stocks, or exchange-traded funds as collateral. The relending program provides low-cost loans to commercial banks, which can then lend to companies for share buybacks, thus boosting equity values.
Economists suggest that the incentives to buy equities are aimed at broadening stock ownership beyond state-backed financial institutions, who had purchased a substantial volume of mainland-listed shares earlier in the year in an attempt to buoy the market.
Wu Qing, chair of the China Securities Regulatory Commission, stated that by the end of August, institutional investors had increased their share of the free float in mainland-listed A-shares from 17% in 2019 to 22.2%. However, he acknowledged that mid- to long-term funds remain insufficient, with retail money movements often impacting stock sentiment.
The program’s success depends largely on whether other financial institutions, currently hesitant, will increase their equity allocations. According to Lu, it remains uncertain if funds will be willing to borrow from the PBoC for stock purchases given the responsibility for potential losses.
Beijing perceives the stock market as an indicator of a healthy economy and a crucial tool for maintaining social stability. Morgan Stanley analysts described the stimulus, equivalent to 3% of the entire free float of the China A-shares market, as a positive step. However, they cautioned that these measures alone are insufficient for China’s overall economic recovery, which depends more heavily on macroeconomic growth and corporate earnings.
Tuesday’s stimulus measures, including simultaneous cuts to the benchmark interest rate and reserve requirement ratio, are significant, with the latter expected to add Rmb1tn in liquidity. Despite this, many analysts argue that only a substantial fiscal stimulus aimed at stabilizing the property market and directly benefiting households will restore confidence and curb deflation.
The PBoC also introduced measures to effectively reduce interest rates on a Rmb300bn scheme to purchase unsold housing, although this program has struggled to gain traction. Robert Gilhooly, senior emerging markets economist at Abrdn, regarded the interest rate cut for existing mortgage holders as the closest approach to a fiscal transfer for households. Nonetheless, he emphasized that more state funding is necessary to rescue the property sector, as household spending is likely to remain weak due to declining house prices and a sluggish labor market.