Growth Dragons Weekly: China Stocks Hit 1-Year High After Bazooka Stimulus
What happened in China this week:
China Stocks Hit 1-Year High After Bazooka Stimulus
Miniso Acquires Yonghui Supermarket, Investors Wonder Why
Alibaba Gears Up For Singles’ Day
XCharge Stock Tripled After IPO Before Settling Lower
#1 China Stocks Hit 1-Year High After Bazooka Stimulus
The People’s Bank of China (PBOC) announced on Tuesday a series of measures designed to stimulate the economy, including a reduction in its benchmark interest rate and a lowering of the reserve requirement ratio (RRR) for banks. These moves are intended to free up additional resources for lending. The PBOC also announced cuts to interest rates on existing mortgages and reduced the minimum down payments for second homes.
The reduction in the RRR is expected to inject approximately 1 trillion yuan (US$141 billion) into the market, according to PBOC Governor Pan Gongsheng. With the RRR for the banking sector at around 6.6%, Pan noted that the central bank still has room for further cuts compared to international levels. He suggested that the PBOC might reduce the rate by an additional quarter to half a percentage point by the end of the year.
Moreover, the PBOC introduced two new tools to boost the capital market. The first is a swap program, initially sized at 500 billion yuan, which provides funds, insurers, and brokers easier access to capital for stock purchases. The second tool offers up to 300 billion yuan in low-cost PBOC loans to commercial banks to finance other entities' share purchases and buybacks. The specifics of the various policies are summarized below:
RRR cut by 50 bps
7-day policy reverse repo rate cut by 20 bps
1-year policy rate MTLF cut by 30 bps
Downpayment for second homes reduced from 25% to 15%
Average interest rates on outstanding mortgages cut by 50 bps
New monetary policy tool established to channel PBOC funding into the stock market
Pan also indicated that additional easing measures could be implemented if necessary, including the possibility of providing an additional 500 billion yuan to further stimulate the economy. He added that the central bank’s contribution to the swap fund, originally set at 60%, could be increased to 100%. Furthermore, the authorities plan to gradually increase core tier 1 capital for China’s six largest commercial banks, demonstrating the government’s determination to boost economic consumption.
China’s reduction in interest rates on existing mortgages is expected to lower monthly payments, freeing up cash for consumers. This move also reduces the urgency for real estate buyers to make early repayments, giving them more flexibility to spend. With low bank savings rates, there is an incentive for consumers to spend rather than save, thereby decreasing the crowding-out effect on consumption and potentially improving overall economic activity as more policies are implemented.
A key question remains: Why has China, typically cautious in stimulating the market, decided to implement such a significant package now? We believe this move is related to the U.S. Federal Reserve's interest rate cuts. If China had acted earlier, the RMB would have weakened further, exacerbating capital outflow issues and making USD-denominated real estate debt more expensive to repay. With the USD now weakening due to the Fed’s rate cuts, China has more room to allow the RMB to weaken in tandem without facing the same challenges as before.
China stocks rallied significantly following these announcements, with every major Chinese index hitting a 1-year high. Year-to-date, the Hang Seng Index and MSCI China are both up over 20%.
This week’s strong performance in the Chinese market indicates that these policies were much-awaited boosters for the economy, as evidenced by a more than 20% increase in international fund flows. Some of the top holdings in these funds and their corresponding 1-week returns are:
JD +35%
Trip.com +24%
Meituan +21%
Alibaba +18%
Baidu +18%
Tencent +13%
We believe that the top echelon in China has the resolve to rescue the stock market, and more policies are likely to follow. This resolve is crucial given China's top-down management style. However, while optimism is high due to the recent economic boosters, sustained rallies in these stocks will require organic growth in domestic consumption to maintain momentum.