Assessing China’s latest stimulus measures

Since late September, there’s been a raft of coordinated policy announcements aimed at bolstering China’s economy on multiple fronts. These include a basket of rate and ratio cuts, supportive measures for the property market and stock market liquidity, fiscal stimulus, and shoring up the banks’ capital positions.¹

We believe this concerted, multipronged approach can empower individuals, corporates, banks, and non-bank financial institutions to engage and participate in economic activities. Compared to the previous round of concerted measures announced in July, this round of monetary easing and fiscal stimulus spans different areas, such as the property market, consumption, and financials, which should boost investors’ confidence in China’s economy.

A basket of rate and ratio cuts

The latest round of monetary easing spans policy rates, the reserve required ratio (RRR), and mortgage rates:

• A 0.2 percentage point policy rate (7-day reverse repo) cut, with a 0.5 percentage point reduction in the RRR. Depending on conditions, the People’s Bank of China (PBoC) highlighted the possibility of a further RRR cut of 0.25 percentage points to 0.5 percentage points by the end of this year.
• A 0.5 percentage point cut to the existing mortgage rate.
• The minimum down payment ratio for second homes was reduced from 25% to 15%.

Liquidity injection planned for the stock market

To further facilitate access to funding, an RMB 500 billion asset swap facility will be set up by the PBoC for non-bank financial (mutual funds, insurers, and brokers) to borrow directly from the PBoC with their quality collateral.² In addition, there will be an RMB 300 billion relending program for corporate buybacks, which could help to extend the pace of stock repurchases.

Fiscal stimulus

On October 8, the National Development and Reform Commission (NDRC) laid out incremental policies to step up fiscal measures, including:

• Accelerating special purpose bond issuance to local government to support growth 
• Encouraging private capital to participate in major infrastructure projects, including railways, energy, water conservancy, etc. 
• Forming a new list of key private investment nationwide
• Supporting private capital to issue infrastructure real estate investment trusts. The NDRC said that it would front-load RMB 100 billion (US$14.1 billion) from the 2025 central budget, with priority given to supporting key urban renewal projects.

The NDRC added that its focus on plans to expand domestic demand, promote consumption, digest the stock of housing, and support the property and capital markets would help the economy achieve a target of about 5% growth for the year.

Shoring up bank capital

The National Financial Regulatory Administration is aiming for a phased strengthening of the core Tier-1 ratios of the six major state-owned banks in China. We view this as a significant move and is the first time it’s happened since 2008. Chinese banks were well capitalised with solid core Tier-1 capital adequacy ratios before the announcement. However, the earnings of Chinese banks in 1H 2024 suffered due to weaker-than-expected loan growth. Therefore, the announcement to inject fresh capital into the large state-owned banks is clearly positive for the China banking sector.

Our assessment of the announced stimulus

Since 2022, diverging China-U.S. monetary policies have constrained China’s policymakers’ ability to pursue a more aggressive easing policy. With the beginning of the U.S. rate cut cycle in September, China has more room to conduct comprehensive monetary easing to improve the system’s overall liquidity and trigger immediate spillover impacts on the physical economy. Lower effective lending rates and deposit costs are positive for Chinese banks, while a lower RRR could provide the banking system with longer-term liquidity (estimated to be RMB 1 trillion).

By lowering existing mortgage rates and allowing existing mortgage payers to refinance their existing home loans based on a lower rate, an estimated RMB 150 billion in interest savings could be released back to mortgage payers, increasing their discretionary spending power.3

In stimulating the demand for property, a cut in mortgage rates and the down payment ratio should help improve home affordability and encourage potential buyers to enter the property market, which is critical to reigniting property market transaction volumes.

Property volume green shoots during the Golden Week

Shortly after the policy announcement on September 24, immediate positive action was seen on the ground. During the Golden Week holiday, cities that offered home purchase discounts recorded at least a 50% increase in project viewings, according to the Ministry of Housing and Urban-Rural Development.

Implications for investors’ positioning

Shortly after the policy announcements were made, transaction activity and volume for the Hong Kong equity markets picked up across the board, and daily turnover recorded a historic high. Valuations also improved but were still below historical averages.

In the near term, potential catalysts include the following:

1. More monetary policy easing is expected: The PBoC has already indicated its intention to lower RRR by another 50 basis points, which indicates China’s determination to stimulate the economy and support the property sector. 
2. Potential fiscal policy announcements: The NDRC laid out plans to step up fiscal measures and announced incremental policies, which include speeding up special purpose bond issuance to local governments to support regional economic growth, supporting urban renewal projects, encouraging private capital to participate in infrastructure projects, as well as supporting more eligible private capital projects including issuing infrastructure REITs.
3. Property: More relaxation in home purchase restrictions, continued policy support for urbanisation, and an implementation facility for housing destocking will also be supportive.
4. Consumption: China has announced 20 key steps to boost service consumption in August. Potential government step-up funding support for consumer goods trade-in and equipment upgrade programs should drive further recovery for the consumer sector over the next few months.

Going into the fourth quarter of 2024, we view these sectors favourably:

• Industrials: We favour auto parts manufacturers and advanced manufacturing leaders, as their earnings stood out from their peers in the first half of 2024, with more substantial growth and revenue guidance, as well as market share gains.  
• Information technology (IT): We favour IT and hardware tech companies that will benefit from the global smartphone recovery.
• Healthcare: We favour subsectors such as biopharma and medical equipment companies with robust pipelines, competitive, high-quality products, and a go-global strategy.

In conclusion, we believe mainland China/Hong Kong equity markets are at an important juncture that deserves investors’ attention. The kick-starting of the U.S. rate-cutting cycle is positive for mainland China/Hong Kong equity markets and interest-rate-sensitive sectors. We’ve seen first-half 2024 earning upward revisions across MSCI China sectors and China corporates are valuing up, with nearly 600 companies announcing interim dividends this year the highest ever.

We see gradual improvements in China’s property sector, coupled with China’s stimulus measures. We think Chinese companies have competitive go-to global strategies that will enable them to gain market share overseas despite headwinds.

1 China's central bank unveils most aggressive stimulus since pandemic | Reuters; China's central bank cuts RRR by 50 basis points to strengthen market confidence - Global Times. 2 PBOC to set up US$71 billion swap facility to prop up stock market | South China Morning Post (scmp.com) 3 Manulife Investment Management estimates, as of October 8 2024.