Gross trading volume on the Shanghai and Shenzhen stock exchanges hit an all-time high of nearly 2.6 trillion yuan, or $370 billion, on the final trading day before the “golden week” of the national holiday of October 1st.
This stock market rally was triggered on September 24 after a series of announcements from the Chinese authorities.
How to analyze the “timing” of these announcements?
First, the Fed’s rate cut finally provided some breathing room that eased foreign exchange constraints allowing China to take easing measures.
Furthermore, the weakness of the economic statistics published in July-August and the real-time activity indicators in September make the annual growth objective of 5%, recently reaffirmed by President Xi, increasingly improbable. In addition, October 1 marks the 75th anniversary of the founding of the PRC, followed by a “Golden Week” (seven days of national vacation), conducive to consumption. Finally, October is still part of the traditional peak season for real estate transactions, after a disappointing September. So better late than never.
It all started after Pan Gongsheng, the governor of the Chinese central bank (PBOC), announced monetary policy easing measures, emphasizing a more accommodative monetary policy stance to support the real economy during a joint press conference with the National Financial Regulatory Administration (NFRA) and the China Securities Regulatory Commission (CSRC).
Here are the main takeaways from this announcement:
- Lower interest rates: the one-year rate is lowered by 30 basis points to 2%.
- Reduction in the mandatory reserve rate of banks: decrease of 50 basis points to 6.6%.
- Recapitalization of banks: approximately $140 billion
- Relaxation of conditions of access to real estate: with a reduction in the initial contribution which goes from 25% to 15% for second homes
- Drop in current mortgage rates: reduction of 50 basis points
- Increased public financing of banks in their programs to purchase existing unsold real estate inventory in order to reduce excess supply
- Direct transfers to households to stimulate consumption
- Relaxation of share buyback rules
- Thoughts on the creation of a stock market stabilization fund
The Politburo, China’s top decision-making body, also sent clearer and stronger easing signals at its September 26 meeting. This is the first time that such a meeting has been held at the end of September and it is also the first time that it has focused exclusively on economic issues.
Top leaders expressed growing concern about headwinds to growth, pledged to launch stronger stimulus measures and reiterated their call to “strive to achieve growth targets for the whole year.”
Regarding the direction of progressive policy support, the authorities pledged to strengthen fiscal and monetary easing in a more proactive manner, facilitate the stabilization of the real estate sector, support the equity market, support the operations of companies in difficulty and to stimulate consumption and employment.
Given the unusual timing of this Politburo meeting, the clearer and stronger easing signals, as well as the high-profile easing measures previously taken by the PBOC, we believe that the persistent weakness in growth has reached a “pain threshold” that has become intolerable for political decision-makers: the recovery policy has therefore been triggered.
Everything accelerated like this. The gaps between market expectations and the actual reality of this policy explain the very strong reaction of the markets.
Additionally, China’s State Council called for faster implementation of easing measures at its September 29 meeting, echoing the Politburo. At the meeting of the Council of State, Premier Li Qiang pledged to “accelerate the pace of deployment and implementation of easing measures.” He called for closer collaboration between different ministries and greater synergy between various policy measures and promised to “accelerate the advancement of 102 key investment projects under China’s 14th Five-Year Plan.” China’s regulator suggested all banks cut interest rates on existing mortgages by October 31. The PBOC also announced it would extend support to facilitate the extension of loans to real estate developers and investors. trust loans until December 31, 2026. During the day, Shanghai, Guangzhou and Shenzhen also implemented local housing relaxation measures, including reductions in down payment ratios and easing of restrictions for the purchase of housing.
The rebound in Chinese stocks therefore seems promising for several reasons:
1. Underweighting: Many investors, both domestic and international, were absent or underweighted in this market, which could fuel the rebound;
2. Recovery plan: Measures exceed initial expectations;
3. Attractive valuations: An average 2024 PER of around 12 for the MSCI China index;
4. Comparison with Western markets: Chinese stocks are becoming more attractive compared to Western markets, more mature and close to their all-time highs.
In summaryit is likely that the rebound in Chinese stocks will continue in the coming weeks. However, it is important to pay close attention to the evolution of the country’s general governance and the confidence of households and entrepreneurs. In the meantime, Beijing’s support seems effective.
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