Is Beijing’s move a game changer?

On 24th September 2024, the People’s Bank of China (PBoC) announced a series of easing measures in a rare public briefing, aimed at stabilising the Chinese economy. While observers note that the measures were not a bazooka, it was importantly the first large co-ordinated easing which China has rolled out in the last few years. The measures, which could potentially unleash trillions of liquidity, covered multiple aspects including:

Monetary easing

• 20 bps cut to the 7-day repo rate
• 50 bps cut to the Reserve Requirement Ratio (RRR), with the flexibility of a further 25 bps to; 50 bps before year end

Strengthening the banks 

• Recapitalising the core tier-one capital of China’s big six state banks

Stabilising the property sector

• 50 bps cut to the existing mortgage rate
• Lowering the downpayment for second home purchase from 25% to 15%, to be line with first home purchases

Supporting the stock market

• An equity swap line (plus buyback facility) of RMB500bn that will allow brokers/insurers/mutual funds to borrow money directly from the PBoC, with the potential of two additional liquidity rounds If needed, bringing the total support to RMB1.5tn

The Chinese equity markets rallied on the back of the announcement, with the CSI 300 Index and Hang Seng Index up 4.6% and 4.1% respectively and the Hang Seng China Enterprise Index (H-share) outperforming with a 5.1% gain. China’s 10-year government bond yield fell to 2% for the first time¹.

The US-led rate cut cycle has opened a window of opportunity for China to launch pro-growth policies. This is timely given China’s lacklustre economic growth year-to-date, and the upcoming 75th anniversary of the country’s political party on 1st October.

Given the unprecedented nature of some of the measures, Eileen Ma, Portfolio Manager, Multi Asset Portfolio Solutions (MAPS), believes that Chinese equities can continue to move higher in the short-term on the back of the liquidity/sentiment boost. However, evidence of a real improvement in fundamentals will be needed to sustain a medium to longer-term uptrend. The MAPS team will continue to monitor the implementation details of the PBoC funding channel, the potential fiscal policy announcement, and look for signs of economic data improvement. US election risks will also play an important role in the coming few months.

Views of the respective China equity and bond markets are as follows:

China A equities: Watching for further fiscal easing

In the past quarter, investors have grown increasingly frustrated, as the Chinese economy continued to lose momentum, and no effective measures have been introduced. Therefore, to Jingjing Weng, Head of Research, China A equities, it is not surprising that the announcement of the stimulus measures has led to such a strong rally in both the A- and H-share markets.

For Jingjing, key highlights in the stimulus measures include PBoC’s clear and positive policy guidance (for the first time) that it can further lower the RRR by another 25 to 50 bps by year end. Notably, it is also the first time the central government is encouraging financial institutions to use leveraged funds to buy A-shares. Most importantly, the PBoC hinted of a more proactive fiscal policy. This suggests that the central bank may stop intervening in the long-term government bond market as it did in the past several months in trying to manage the rapid rally in bond prices. This paves the road for more fiscal easing which has been long awaited by the market.

While Jingjing believes that the recent rally reflects improved investor risk appetite and a better policy outlook, further market upside will need to come from 1) greater fiscal easing; 2) more clarity on the set-up of the funding support to non-financial/listed companies and 3) better economic data. Jingjing feels that greater fiscal spending, or a larger fiscal deficit must be in place before we can envisage any growth recovery or fundamental improvement in the Chinese economy.

According to Jocelyn Wu, Portfolio Manager, Greater China equities, she expects the National Team² (NT) to follow their January playbook and front-load their equity purchases at a rate close to USD5 bn/day. At the point of writing, the inflows into the Exchange Traded Funds (ETFs) targeted by the NT have reached levels comparable to those seen during the July intervention, implying inflows of about USD3.5bn/day. Although these inflows are not as large as in January, they are significant enough to send a strong positive signal to the market. As such, Jocelyn believes that the H-share market could experience further gains in the near term given attractive valuations and the lift in investor sentiment from the positive policy surprise.

The Greater China equity team believes that growth-oriented stocks are likely to benefit more from the improvement in investor sentiment. They see attractive opportunities in E-commerce stocks which have been trading at low valuations due to the lack of foreign investor interest. With the overhang of interest rate cuts on existing mortgages now removed, select Chinese banks may also look attractive. Meanwhile, beaten-down consumer stocks may also benefit from follow-on policies that could lift consumption.

China government bonds: Yields can fall further

Chinese government bond yields fell (i.e. bond prices rose) initially on the news of the monetary easing measures. However, bond investors subsequently grew concerned over market expectations that further fiscal measures could be announced soon.

Although the balance of risks has shifted, Matthew Kok, Portfolio Manager, Asian Fixed Income, believes that China bond yields can fall further. The PBoC has indirectly indicated that their policy adjustments are influenced by the Federal Reserve (Fed) and the RMB. With the Fed poised to cut rates further, it gives the PBoC more room to ease monetary policy, which should be favourable for bonds.

While there could be some rotation of funds from bonds into equities, the overall injection of liquidity can also support yields moving lower. This is because investors are likely to look for better-yielding assets as onshore deposit rates fall sharply.

This should lead to a sustained demand for wealth management products. Additionally, banks’ demand for China government bonds is likely to remain intact until credit growth catches up with the surge in liquidity, a process which is expected to take some time.

While the easing measures are positive for the economy, Matthew feels that significant fiscal support may not materialise that quickly as China is still focused on deleveraging the economy. Measures to support growth are likely to be aimed at stabilising the economy, rather than providing a strong boost to some parts of the economy such as the property sector. Meanwhile, given the overcapacity issues in several parts of the manufacturing sector, as well as falling input and output prices, China’s inflation is likely to stay low for some time, potentially keeping a lid on bond yields. With the yield curve likely to bull-steepen on the back of the PBoC’s easing, the Asian Fixed Income team prefers the 5–7-year part of the curve.