China market support may fizzle out if key issues remain unsolved
Summary
China’s push to bolster its stock markets has stirred optimism, but begs the question of whether investors will take the bait amid lingering doubts about the economy’s underlying weakness.
China’s over $100 billion push to bolster its stock markets has stirred optimism, but begs the question of whether investors and businesses will take the bait amid lingering doubts about the economy’s underlying weakness.
In an unprecedented move, the People’s Bank of China vowed to invest 800 billion yuan of liquidity, equivalent to $113.77 billion, into Chinese stock markets through new swap and loan facilities, a move cautiously welcomed by analysts.
While the measures are an “absolute positive," the key will be in the implementation, Morgan Stanley analyst Laura Wang said in a note.
Under the liquidity facility, 500 billion yuan will be available in the first phase for funds, brokers and insurers to buy Chinese stocks, while an additional 300 billion yuan will go toward financing share buybacks by publicly listed companies.
Analysts say some challenges that are likely to arise during implementation include the ability and willingness of investors to take risks, and the gestation period it takes for the support to positively affect economic data points, which will signal whether the Chinese economy’s fundamental challenges have been addressed.
Institutional investors’ “incentives to use PBOC facility to build up leverage remains constrained by the availability of attractive investment options," Citi analysts said in a note, adding that the investment risk and repayment of debt taken from the facilities would ultimately rest with the borrower.
The size of the fund itself could be another challenge. Some say the fund, in this first phase, isn’t big enough to be meaningful. CreditSights said in a note that the liquidity facility announced by the central bank in the first phase accounts for only 1% of Chinese equity markets’ market capitalization.
The central bank’s moves were part of a broader monetary package that included slashing banks’ reverse ratio requirements. Chinese authorities could introduce more easing measures in the coming months.
China’s equity markets experienced some of its biggest gains in more than four years immediately after the announcement of the stimulus package. The benchmark Shanghai Composite Index rose 1.2% on Wednesday after ending 4.15% higher Tuesday. Similarly, Hong Kong’s Hang Seng Index gained 0.7% after surging 4.1% in the previous session.
Stock markets in China have been among the worst performers globally since the pandemic, dragged by a slowing economy and capital outflows. Last year, the Hang Seng Index lost 14%, while the Shanghai benchmark was down 15%.
Since the start of the year, authorities have undertaken piecemeal measures to instill confidence among investors and address market volatility, such as suspending the lending of restricted shares to make short selling more difficult and tightening supervision of new listings.
But the measures haven’t been able to move the needle much due to lingering concerns about the economy’s health, especially after August economic data came in weaker than expected. Home prices in China registered their steepest decline in nine years for the month, while retail sales and industrial production activity continued to slow.
Aside from the facilities to inject liquidity, the PBOC is also studying the likelihood of a market-stabilization fund, PBOC Gov. Pan Gongsheng said Tuesday.
While direct government buying of stocks could help boost returns in the short run, plans to address structural headwinds facing the Chinese economy are required to rerate China equity, analysts said.
“The scale of the rebound and its sustainability hinge on a successful breakout from deflation and corporate earnings growth bottoming out," Morgan Stanley’s Wang said.
Write to Sherry Qin at sherry.qin@wsj.com and Jiahui Huang at Jiahui.Huang@wsj.com
