China’s new stimulus: Groundhog Day or a fresh dawn?

Key takeaways

• Chinese authorities have launched a new package of stimulus measures designed to support real estate and stock markets, and boost investor sentiment
• The central bank has cut its policy rate by 20 basis points, in line with our expectations, and has further lowered banks’ reserve requirements
• The biggest surprise was the support for equity markets, in the form of new swap and loan facilities to support stock buying
• We retain a cautious long-term outlook on China’s economy and assets, pending the outcome of the US elections. For risk tolerant investors looking to increase their China-related allocations, selected Hong Kong listed consumer discretionary and communication stocks may be worth considering.

Chinese stock markets have rebounded after the launch of a coordinated stimulus package from Beijing. We await the outcome of the US elections to reassess our fundamentally cautious outlook and investment positioning on China. For more risk tolerant investors keen to increase exposures to Chinese assets in the interim, several areas may be considered on a tactical investment horizon.

The People’s Bank of China (PBOC), National Financial Regulatory Administration (NFRA), and China Securities Regulatory Commission (CSRC) announced a package of growth support measures on 24 September in a clear attempt to boost market sentiment. The Shanghai Composite equity market responded positively with the best rally in over four years. Could this new stimulus mark a fresh dawn for China’s economy and assets?

Stimulus package surprises low expectations

The stimulus package delivered more than we had assumed likely ahead of the US elections. We had thought that Chinese policymakers would opt for only a combination of limited monetary easing and additional regulatory tweaks for the real estate sector in advance of November’s ballot. This is because the negative shock of a possible second Trump term could undo the effects of any such package. That said, and setting aside the US elections, disappointing Chinese economic data and the start of the rate-cutting cycle by the Federal Reserve had both advocated for an earlier move.

While the PBOC cut its benchmark short-term interest rate by 20 basis points (bps) to 1.5%, in line with our forecast, it cut banks’ reserve requirement ratio by 50 bps. PBOC Governor Pan Gongsheng also hinted at additional cuts to these ratios should economic conditions warrant.

More support was announced for the struggling real estate sector. In order to reduce the inventory of unsold homes, the PBOC adjusted the terms of its loan support facility to make it more attractive for local state-owned enterprises to buy unsold homes directly. Authorities will also allow the earlier refinancing of existing mortgages, although on a slightly smaller scale than earlier media reports had suggested. The downpayment ratio for second homes was also lowered from 25% to 15%. Six major banks were promised a boost to their capital.

The new support scheme for equity markets was a positive surprise. The PBOC has created a swap facility worth 500 billion yuan (CNY), or the equivalent of just over USD 70 billion. Institutional investors including asset managers, funds and insurers can pledge various risk assets as collateral for highly liquid assets, to boost their capacity to buy stocks. This announcement was accompanied by a new facility worth CNY 300 billion, where loans can be used to fund stock buybacks. During the press conference, policymakers hinted at the re-launch of a state-backed market stabilisation fund.

While the individual measures may seem limited, and resemble those tried before, there was a sense of urgency in their simultaneous announcements. This was a strong attempt to boost flagging investor sentiment. Against profoundly depressed expectations, it could challenge overwhelmingly negative investor positioning. Pressure on the yuan is easing and creating some manoeuvring room for the PBOC to augment its liquidity provision.