Commentary: China stimulus to the fore

It has been a landmark week for China’s financial assets, with the equity markets displaying a degree of exuberance not seen in years. The week was marked by a series of monetary, fiscal, and structural measures announced by the authorities to support liquidity in the banking system, lower the cost of borrowing for households and corporates, boost activities in the property sector, and rebuild confidence in the equity markets. The authorities used language of forceful nature to underscore their seriousness, unlike any seen so far in their efforts to stabilise the Chinese economy and financial markets.   

We have long stated that a prolonged period of economic drag from China’s property market malaise would be impossible to avoid. This has been the case in post-bubble burst episodes in Europe, Japan, and the US, with China unlikely to be an exception. Key was to balance the inevitable property market drag with liquidity and confidence boosting measures to support other parts of the financial sector, particularly the stock market. This was the key differentiating factor for the US economy during 2008-18. Unlike Japan in the 1990s or China so far, an extended period of housing-related price correction, deleveraging, and restructuring in the US after the global financial crisis was accompanied by sustained rally in the equity and bond markets, driven by extraordinary quantitative easing and asset purchase programmes. We have been waiting to see China match such measures, but concerns about moral hazard and reflating asset bubbles have held back the authorities so far. The gloves appear to be coming off at long last; the authorities may have reached the point where debt-deflation risks are now being considered graver than the possibility of distorted incentives that may follow ultra-loose fiscal/monetary policy measures.

Between various regulatory tightening measures and the pandemic lockdown, confidence in capital markets have been weak in recent years. Trade/tech war with the US and its allies have not helped matters either. Admittedly, the authorities had taken a series of steps already in the last couple of years to stabilise the housing sector and the economy, and the totality of these measures amount to a substantial degree of support. But it is now well past the time to wait and see their impact on the economy. The unscheduled September meeting highlighted the urgency of China’s policymakers.

In their strongest housing pledge to date, officials committed to halting the decline in the property market, which saw new home prices decline at the fastest pace in nine years in August. Construction of new housing projects would face stricter curbs to alleviate oversupply, while “whitelist” loans for unfinished developments would be scaled up. To drive much-needed investment, local governments were urged to accelerate the issuance and deployment of special bonds towards infrastructure. Seen as the most direct means to spur near-term demand, local spending has faced hurdles in project selection amid deleveraging efforts.

On asset markets, the commitment to “boost the equity market” was notably more encouraging than previous vows simply to “improve stability.” The language implies an aim to buoy confidence through pushing up share prices. The Politburo further pledged stronger support for job seekers and lower-income groups, building on recent cash aid for those facing hardship. Boosting employment could help the ailing retail sector, where sales growth in August hovered among the slowest paces in years.

Our take on the other measures:

• Reduced reserve requirement ratio is projected to release approximately RMB1trn in long-term bank capital. This augmented liquidity will help facilitate the planned issuance of RMB2.1trn in special local government bonds through the end of the year. Such funding supports ongoing infrastructure investment and development projects without crowding out private sector lending.
• The 20bps reduction in the 7-day reverse repo rate would decrease the medium-term lending by 30bps and loan prime rates by 20-25bps. This calibrated adjustment seeks to stimulate investment and consumption by lowering the financing costs borne by enterprises and consumers.
• While the cut and alignment of downpayment ratios for first and second homes to 15% is unprecedented, the actual impact may be limited as many cities have already eased first-home definitions. Similarly, lowering existing mortgage rates will ease household burdens, but unlikely spur significant new demand given weak price expectations and macro uncertainties dampening appetite for leverage. Yet there is a positive angle in that the interest savings for 50mn households totalling RMB150bn annually could boost consumption equivalent to 0.3% of retail sales or 0.1% of GDP.
• Lowering RRR and existing mortgage rates could negatively impact bank NIM by 5-6bps if deposit rates remain unchanged, But the RRR cut also provides lower funding cost for banks. The new swap facilities will enhance eligible entities' liquidity access through pledged asset transactions with the central bank. Targeted relending programs will also direct bank financing to listed companies and major shareholders, facilitating stock buybacks and enriching shareholdings. Combined, these initiatives seek to bolster market confidence and stability after previous efforts fell short of driving a sustainable recovery. State investment vehicles have reportedly purchased an estimated US$80bn of onshore ETFs YTD to prop up valuations. Regulators have also tightened curbs on short selling and quantitative trading.

It is clear from the market reaction in recent days that there has been a return of long-awaited animal spirits in China’s capital markets. This ought to help consumer sentiment going forward, provided the measures are backed up by more rate cuts and liquidity injection, and further incentives to make the property market functioning across the country. China’s headwinds won’t be solved entirely by fiscal/monetary stimuli, but for a trough and rebound to happen, those are prerequisites, in our view. 


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Taimur Baig, Ph.D.

Chief Economist - Global

[email protected]

Mo Ji, Ph.D. 

Chief China Economist - China & Hong Kong 

[email protected]

 

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