China is stepping up stimulus to boost market confidence. Is this enough?

BEIJING – Expectations are growing for more support from China to boost its economy and stock markets – especially after monetary easing announcements made by the central bank on Wednesday.

Starting in February, central bank Governor Pan Gongsheng said in a press conference that starting September 5, the People's Bank of China will allow banks to hold smaller cash reserves, his first in this position.

The central bank said that cutting the reserve requirement ratio (RRR) by 50 basis points is set to free up 1 trillion yuan ($139.8 billion) of long-term capital.

“Last [PBOC] “These announcements may be interpreted as the beginning of a political pivot from previous reactive and fragmented actions by investors, and they will continue to look for further signs and acts of political support,” said Tao Wang, head of Asian economics and chief China economist at UBS Investment. The bank said in a note on Thursday.

Beijing has been reluctant to embark on a massive stimulus program, which would also widen the yield gap between China and the United States given the Federal Reserve's hawkish stance on monetary policy. The People's Bank of China (PBOC) left its benchmark lending rate unchanged again on Monday, sticking with key interest rates on loans.

Ting Lu, the company's chief China economist, said that the size of the central bank's announcement on Wednesday regarding reducing the required reserve ratio exceeded Nomura Bank's expectations of a 25 basis point reduction.

“We believe this larger-than-expected reduction in the required reserve ratio is another sign that the People's Bank of China and senior policymakers are becoming increasingly concerned about the ongoing economic downturn, which we have been pointing out since mid-October last year, and the recent stock market performance,” he said. In a note Thursday.

“What's even more interesting is that the policy decision was revealed in a less unusual way, with the governor of the People's Bank of China (PBoC) personally making the announcement during a question-and-answer session at the press conference,” Lu said.

On Wednesday, Ban told reporters that the central bank and the National Financial Regulatory Administration will soon publish measures to encourage banks to lend to qualified developers. the The document was released later that day.

“It is an important step by regulators to strengthen credit support for developers,” UBS's Wang said. “For developer financing to improve fundamentally and sustainably, property sales must stop declining and begin to recover, which may require further policy efforts to stabilize the property market.”

Real estate woes are just one of many factors affecting Chinese investor sentiment. The huge real estate industry has depressed growth and, coupled with falling exports and weak consumption, has prevented the economy from recovering from the pandemic as quickly as expected.

Mainland Chinese and Hong Kong stocks have steadily fallen to multi-year lows.

Stocks rose this week after a series of government announcements and media reports pointing to upcoming state support for growth and capital markets.

Such efforts to stabilize the stock market help set a limit to prevent the market from giving in and falling further, Winnie Wu, chief China equity strategist at Bank of America, said Thursday on CNBC's “Street Signs Asia” program.

But she noted that a fundamental shift in the economy is needed for investors to return to Chinese stocks, which will take some time.

The second largest economy in the world It grew by 5.2% in 2023, according to official figures released last week. This is a marked slowdown from growth that exceeded 10% in previous decades.

Chinese Premier Li Qiang on Monday He called for much stronger measures To enhance market stability and confidence, according to official readings.

On Tuesday, Bloomberg News, citing people familiar with the matter, said Chinese authorities were looking to use money from state-owned companies to stabilize the market — in a package of about 2 trillion yuan ($278 billion).

The governor of the People's Bank of China (PBOC) on Wednesday did not mention such a fund, although he took the initiative to talk about capital markets, Citi and team's Philip Yin noted in a report. The 2 trillion yuan in capital would have to be deployed over weeks or months in light of current regulations, and would only represent a small portion of current trading volume, they said.

“More importantly, it appears insufficient to make a real impact on the underlying challenges in the economy,” Citi analysts said.

For many consumers and businesses in China, uncertainty about the future remains high following the Chinese government's recent crackdowns on internet technology companies, the gaming sector, after-school education companies, and real estate developers.

Tensions between the US and China, centered around technology competition, also weighed on sentiment.

Since last summer, the Chinese authorities have been keen to talk about support for the non-governmental private sector.

“Ultimately, what will get fundamentals back on track is a significant improvement in confidence and sentiment – ​​which is why the latest measures are designed to boost confidence,” said David Chow, global market strategist for Asia-Pacific (formerly Japan). ) at Invesco.

“The path forward to economic normalization lies in the portfolios of Chinese households and companies, and less so in China's stimulus toolkit,” he told CNBC.

But markets in general were waiting for more action. Chinese authorities in October have already announced the release 1 trillion yuan of government bonds, along with a rare increase in the deficit.