This stimulus plan was announced by the People’s Bank of China (PBOC), the China Securities Regulatory Commission (CSRC) and the National Financial Regulatory Administration (NFRA) on 24 September 2024, with the stated aim of supporting the property and stock markets.

What are the main measures announced?

The measures are mainly monetary and regulatory:

- interest rate cuts (lowering the reverse repo rate by 20 basis points (bp) to 1.5%, lowering the five-year prime lending rate by 25bp). These measures are designed to encourage bank lending and reduce financing costs for economic agents;

- a 50bp reduction in the banks’ minimum reserve ratio. This ratio corresponds to the proportion of deposits that each bank must hold with the central bank. Such a measure could boost the supply of credit and, ultimately, household consumption, which is structurally very weak. The Chinese authorities hope that this measure will eventually generate more than 1,000 billion yuan (€127bn) of liquidity in the financial system to stimulate credit. The Central Bank of China (PBOC) has stressed that there could still be further cuts to come;

- strengthening the Core Tier 1 ratio of the six major commercial banks. This measure will increase their ability to extend credit;

- lowering the minimum down payment ratio for second homes to 15% from 25%, now aligned with the down payment rules for first homes;

- intensification of the CNY 300bn PBOC refinancing programme announced last May to provide 100% of the principal of bank loans to regional SOEs to buy unsold homes, up from 60%;

- provision of at least CNY 500bn of liquidity support for equities, including a swap facility allowing securities firms, funds and insurance companies to tap PBOC liquidity to buy equities by pledging them;

- separate specialised refinancing facility for listed companies and major shareholders to buy back shares or increase their holdings;

- the forthcoming publication by the CSRC of measures to support mergers and acquisitions in China.

This basket of measures is designed to halt the continuing decline in consumer and investor sentiment towards asset prices. The scale of this monetary easing and its timing have clearly surprised us positively. Given the disinflationary global environment and much less restrictive monetary policies, the central bank now has more room for manoeuvre to be even more accommodative by supporting domestic growth without severely impacting its currency.

Although we will have to wait to see how these stimulus policies are actually transmitted to the economy as a whole, market sentiment has clearly been boosted by these stronger-than-expected measures. However, some scepticism may persist as to the lasting impact on China's growth or on the property market. For example, the PBOC’s refinancing programme has seen slow take-up due to low potential returns in the property sector and weak buying sentiment, while developers continue to face financing risks.

Although households are expected to reduce mortgage payments by CNY 150bn (0.1% of GDP) due to the expected reduction in interest rates on existing mortgages, the pass-through to consumption will not be complete, as the propensity to spend is likely to be low due to the still very low level of Chinese consumer confidence.

Outlook

Despite uncertainties about the eventual transmission to sentiment, consumption and even GDP growth, one thing is certain--China’s recent measures are moving in the right direction.

The concerted effort to announce various measures shows a willingness to communicate policy, a welcome (and necessary) pillar of stability for consumer/investor/business sentiment as they adjust their expectations.

Beyond the short-term boost to confidence, the market will probably wait to see whether China actually adds a fiscal component to the monetary component of the stimulus (aimed at stimulating consumption via direct fiscal measures).

The good news is that Chinese policymakers have signalled that there will be further policy steps to support growth, fuelling market expectations.

The light at the end of the tunnel for Chinese equity investors?

This surprise announcement by the Chinese authorities of a vast stimulus programme had a massive impact on the Chinese equity markets: the Hang Seng China Enterprises Index (HSCEI) and the Shanghai Shenzhen CSI 300 Index both rose by almost 14% and 20% (in USD terms), respectively, from 23 September to 31 October 2024.

Although this rebound came from near 20-year lows, and the Chinese market is now largely ignored and under-held by international investors, the stimulus package has boosted the morale of equity investors, who see it as a first step towards a potential, substantial and broad-based rebound. It is also possible that international investors may initially exercise a degree of caution in assessing the imminence of further policy announcements, particularly on the fiscal front and the transmission of stimulus measures to real consumption.

At present, the main factors supporting this market are (very) low valuations (the forecast P/E of the MSCI China remains reasonable at 9.5x after the current rebound, at the time of writing) and a possible shift of global investment flows to China, in addition to large specific liquidity programmes for local equity markets. Another potential catalyst for Chinese equity markets is the forthcoming launch of the National Stabilisation Fund backed by the Central Bank.

In our asset allocations, we remain positive on emerging markets, where we believe that China will provide a much-needed additional driver for the region as a whole, with positive repercussions for the rest of Asia. Investors are still largely absent from this market, which suggests good upside potential.

This article was originally published in .