China stimulus boosts revival hopes, as local investors look for new opportunities

The Chinese government surprised global markets with a series of significant policy announcements that could boost its economy and offer sharemarket opportunities for investors.

The PBOC lowered the required reserve ratio by 50 basis points, releasing liquidity into the financial system in an attempt to improve access to funding and support business activities.

China’s decisive pivot from debt control to growth support could be the catalyst needed to restore confidence and unlock value in China’s markets.

The Chinese government surprised global markets with a series of significant policy announcements recently aimed at boosting economic growth, stabilising the property market, and revitalising stockmarkets.

This co-ordinated effort from China’s top regulators – the People’s Bank of China, China Securities Regulatory Commission, and the National Financial Regulatory Administration – marks a decisive shift from debt control to growth support.

These measures exceeded the market’s expectations, triggering a substantial rally in China’s stockmarkets over the following days, which resulted in the Chinese equities market moving into technical bull market territory (+24 per cent in September 2024).

The stimulus package aims to tackle three main concerns:

1.Economic growth: The PBOC lowered the Required Reserve Ratio by 50 basis points. his move released approximately RMB 1 trillion ($205bn) worth of liquidity into the financial system, aiming to improve access to funding and support business activities.

2.Property market: To address the ongoing property sector slump, interest rates on existing mortgages will be cut by an average of 50 basis points, offering relief to 50 million households and potentially saving RMB150bn in interest expenses. This move should ease financial pressure on homeowners and stabilise the property market.

3.Stockmarket revival: The introduction of an RMB500bn swap facility for brokers and funds to purchase stocks, along with a 20-basis-point cut in policy rates, has injected much-needed liquidity into the market. Additionally, an RMB300bn refinancing facility was established to enable listed companies to conduct share buybacks, a move aimed at boosting investor confidence.

These measures, combined with the promise of additional support from the government, represent one of the most comprehensive policy shifts we’ve seen in recent years.

Investor sentiment is improving

Following the announcements, investor mood shifted from scepticism to optimism due to expectations that the measures would support economic growth and could potentially lead to a sustained market rally.

China’s equity markets experienced a surge reminiscent of the post-GFC rally. The CSI 300 Index of large-cap shares jumped 16 per cent in one week – its most significant weekly gain since 2008. The intensity of the trading activity overwhelmed the Shanghai Stock Exchange, resulting in processing glitches and transaction delays.

In Hong Kong, the Hang Seng China Enterprises Index climbed for an 11th straight session, marking its longest-winning streak since 2018.

Investors, both domestic and global reacted with enthusiasm, driving the MSCI China Index up by 22 per cent in four days.

Why this time could be different

Although previous attempts at stimulating China’s economy – such as in April with the issuance of long-term special government bonds – failed to create lasting momentum, there are reasons why it may work this time round:

• More supportive external environment: The US Federal Reserve’s rate cut in September has created a more favourable environment for Chinese policymakers to implement stimulus measures, reducing concerns about capital flight or currency devaluation.

• Increased sense of urgency: The deterioration of China’s economic fundamentals, particularly the property market downturn and weakening consumption, has reached a point where policymakers see a need for decisive action. This urgency is evident in the off-schedule Politburo meeting and the unusually direct language used in the policy statements.

• More comprehensive and targeted measures: Unlike previous efforts, the measures address not just monetary policy but also property challenges, stockmarket stability, and consumer confidence. More measures may be announced in the coming weeks.

Implications for investors

China’s policy shift highlights some key considerations for investors:

• Valuation opportunity: Chinese equities are currently trading at attractive valuations. The MSCI China Index has a 12-month forward P/E ratio of around 10.3x (as of September 30), making it one of the cheaper markets globally. This presents a unique entry point for investors looking for value in a market with substantial growth potential.

• Portfolio diversification: China’s low correlation with other global markets, especially during periods of global market volatility, makes it an excellent diversification option for investors. With additional fiscal stimulus measures expected, China could even outperform other developed and emerging markets in the coming quarters.

• Sector opportunities: The recent policy announcements have created positive momentum across sectors such as technology, consumers, property, commodity, healthcare, and financials; high-quality companies with strong fundamentals are likely to benefit the most from the increased liquidity and supportive policies.

The latest stimulus package marks a pivotal moment for the country’s economic trajectory and equity markets. As global investors seek stability amid uncertainty, the Chinese government’s decisive pivot from debt control to growth support could be the catalyst needed to restore confidence and unlock value in China’s markets.

With the likelihood of additional policy support, investors may want to revisit their Chinese equities allocation.

Victoria Mio is head of Greater China Equities at Janus Henderson Investors.