[ANALYSIS] China’s stimulus bazooka; details and thoughts

Analysis details (08:10)

OVERVIEW

• PBoC Governor Pan overnight announced a raft of policy stimulus, targeted at the broader economy, property market and capital markets. Despite the continuous calls by economists for stimulus after a string of concerning data points (inflation, trade, activity data), some desks were surprised at the magnitude of support announced, with some also noting it had come earlier than they had expected. That being said, it remains to be seen how effective the moves are.

STIMULUS

Broader Economy

• 
  Reverse Repo: Lowered its benchmark 7-day Reverse Repo rate by 20bps to 1.5%; which will lead to the reduction of 1-year MLF and LPRs.


• 
  MLF/LPR: PBoC Governor Pan stated the MLF rate will be lowered by 0.3ppts and LPR will be lowered by 0.2-0.25ppts.


• 
  Reserve Requirement Ratio (RRR): Broad-based 50bps cut to RRR (bringing the RRR for major banks down to 9.5% from 10.0%), releasing some CNY 1tln in liquidity.


• PBoC Governor Pan said the financial weighted reserve ratio for large banks will be reduced to 8% after the RRR cut and they might further cut RRR by year-end.

Property Sector

• 
  Down payments: Lowered down payments for second homes to 15% from 25% and will no longer distinguish between down payments for first and second homes which will be unified at 15%.


• 
  Mortgage Rates: Reduced mortgage rate for existing mortgages by 50bps; will narrow rate gap between new and existing mortgages.

Capital Market

• 
  Relending: Initiating a relending facility of CNY 300bln with 1.75%; will guide banks to support listed firms’ share purchases and buybacks.


• 
  Swap Facility: Plans at least CNY 500bln of liquidity to support stocks; will allow firms to tap liquidity when purchasing stocks via a swap line.


• China Securities Regulatory Commission Chairman said they will issue guidance for medium-term and long-term funds to enter the market and will issue measures to promote mergers, acquisitions and reorganisations. China will also release six new measures to support M&A soon and allow funds and brokers to tap PBoC funds.

MARKET REACTION

• 
  SENTIMENT: Boosted APAC sentiment with the risk appetite reverberating into Europe (Euro Stoxx 50 +1.1%) whilst US equity futures post more modest gains (ES +0.1%); China-exposed sectors on-watch (luxury, autos, tech, consumer goods, mining etc).


• 
  STOCKS: Chinese stocks heavily outperformed in APAC trade with Hang Seng and Shanghai Comp up over 3.5% apiece whilst CSI300 rose 4% at one point, set for the best day since March 2022.


• 
  FX: CNY and CNH firmer. USD/CNH declined from a high of 7.0695 to a low of 7.0309.


• 
  BONDS: A rally was seen across Chinese bonds in a reaction to the raft of stimulus.


• 
  COMMODITIES: Base metals bolstered with Dalian iron ore futures rising over 4% and 3M LME copper rising almost USD 200/t.

ANALYSTS’ THOUGHTS

Capital Economics:

• “Monetary policy has lost much of its effectiveness in China. As such, today’s moves are unlikely, on their own, to drive a turnaround in credit growth and economic activity.”.


• “The most important thing about today’s announcement is that it signals a greater sense of urgency around supporting the economy than had been on display previously”


• “We won’t rush to upgrade our growth forecasts just yet.”

ING:

• “The net impact will depend on whether we see further cuts ahead or whether the PBOC falls into a wait-and-see mindset after today's policy package.”


• “A 20bp cut [to the 7-day Reverse Repo Rate] represents a slightly stronger than expected move.”


• “As we saw with the February RRR cut, this is unlikely to have a major impact on credit activity by itself, but in conjunction with the rate cut could help support credit activity.”; “This move in our view is mostly to help buoy sentiment”


• “We continue to believe that there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory. If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.”

Goldman Sachs:

• "The rare simultaneous cut of policy rates and RRR, the relatively large magnitude of cuts and the unusual guidance on further policy easing indicated policymakers’ growing concerns over growth headwinds."


• "That said, more demand-side easing measures, especially fiscal easing, are likely to be needed to improve China’s growth outlook."


• "Given the guidance from the PBOC governor, we expect another 25bp RRR cut in Q4 for this year, and maintain our forecast for additional RRR/policy rate cuts in 2025 (two 25bp RRR cuts in Q1/Q3 and two 10bppolicy rate cuts in Q2/Q4 2025)"

Oxford Economics:

• “The move is bold by historical standards and came earlier than we had expected.”


• “We believe the recent rapid development in both domestic and external conditions were the major driving forces behind the PBoC's latest move.”


• “We will assess the policy impact and review our China forecasts in the near future.”

24 Sep 2024 - 08:10- Fixed IncomeResearch Sheet- Source: Newsquawk