Chinese stocks are in rally mode for a second time already this year. The first phase lasted from the middle of January to the middle of May, with the market as a whole, as measured by the Hang Seng China Enterprises Index, rising a proud 40% during this period. It was right at the start of the “Year of the Dragon” that the markets in the Far East plucked up their courage again. And with good reason: coordinated fiscal and monetary incentives were created in order to ramp up demand and keep the Middle Kingdom on track for growth. The government launched a multi-billion euro package aimed at supporting the property sector, while the People’s Bank of China (PBoC) embarked on a cycle of interest rate cuts. A raft of other programmes to improve consumer confidence, such as subsidies for electric cars, were also introduced.
The second upward phase for Chinese stocks only started in mid-September. Following persistently weak news from the property sector and the economy as a whole, speculation arose about further support measures. Prices for newbuilds in China, for instance, fell back faster in August than at any time in the last nine or more years. Meanwhile, the annual growth in industrial production slipped from 5.1% to 4.5% in August, while the retail sector also disappointed with a rise in sales of only 2.1%. This led to doubts about whether the 5% growth target for gross domestic product could be achieved. Hopes of further interest rate cuts and other economic incentives were not dashed: at its meeting on 23 September, the Chinese central bank announced a comprehensive range of loosening measures aimed at propping up the weakening economy.
The most extensive package of monetary policy measures since the pandemic was adopted chiefly with the goal of stabilising the struggling housing market. They included a cut in the minimum deposit from 25% to 15% of the purchase price, as well as lower minimum reserve and refinancing rates intended to boost lending by commercial banks and reduced interest rates on lines of credit. Specifically, central bank governor Pan Gongsheng cut the reserve requirement ratio (RRR) for banks by 0.5 percentage points. This gives the banks some CNYtn 1, equivalent to just under USDbn 120, of additional funds for lending. Other important base rates were also trimmed, with the seven-day reverse repo rate, for instance, falling by 0.2 percentage points. Mortgage rates are likewise set to decline. The central bank instructed all commercial banks to lower rates on current home loans in stages by at least 30 basis points below the key loan prime rate (LPR), which is used to price mortgages, by the end of October.
The PBoC is hoping that its stimulus package will not only lend new impetus to the economy of the People’s Republic, but also boost the stock market. In the latter it has already succeeded: Chinese stocks posted their best week since 2008 on the back of the new measures. There are several reasons for the strong performance. For one thing, the PBoC has created two new instruments in order to boost the capital market. One of these is a SWAP programme amounting to CNYbn 500 which gives funds, insurers and brokers easier access to finance for buying shares. For another, the central bank is making low-cost loans of up to CNYbn 300 available to financial institutions to help them fund share purchases and buybacks by companies. Additionally, the price rally is likely also resting on the hope of further cuts in interest rates. The central bank held out the prospect that the reserve rate could be cut by another 0.25 to 0.50 percentage points over the course of the year, depending on the liquidity situation. Whether the stimulus has an impact on the economy will become clear with the economic data over the next few weeks.