China and Hong Kong stocks jump as aggressive stimulus boosts sentiment

BEIJING - China and Hong Kong stocks rallied broadly for a second day on Sept 25 as investors basked in the afterglow of a wide-ranging stimulus package announced the previous day.

China’s blue-chip CSI 300 Index and the Shanghai Composite Index gained, while Hong Kong’s benchmark Hang Seng rose 0.7 per cent.

Beijing on Sept 24 announced a slate of support measures including rate cuts, mortgage requirement easing, and fresh funding for equity purchases,

in a bid to prop up the ailing economy.

In the wake of the announcement, the People’s Bank of China (PBOC) on Sept 25 cut the rate of one-year medium-term lending facility loans to some financial institutions to 2 per cent to 2.3 per cent.

Real estate and broker sectors led stock market gains in China, while Hong Kong-listed mainland property stocks rose.

“Between now and the ad hoc Politburo meeting in end-October, in which fiscal measures may be announced to improve demand, the market rally could continue to bring markets higher over the next few sessions,” UBS said in a note.

PBOC governor Pan Gongsheng on Sept 24 said the central bank will set up a facility allowing securities firms, funds and insurance companies to tap liquidity from the PBOC to purchase equities.

There are also plans to set up a specialised relending facility for listed companies and major shareholders to buy back shares and raise holdings.

The moves will unleash at least 800 billion yuan (S$146.3 billion) of initial liquidity support.

The steps mark the latest effort to stem a sell-off in China’s stock market, after previous measures failed to drive a sustainable rebound.

The authorities also cut the amount of money banks must hold in reserve and reduced a key policy rate as part of a push to help the economy meet the official annual growth target of around 5 per cent.

“What surprised the market is the clear direction and funding from the PBOC in being a firm liquidity resort to prop up the stock market,” said Ms Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong.

“In the near term, Chinese capital markets should enjoy a sweet liquidity honeymoon period, while China is buying time to fix more deep-seated growth problems.”

Beijing’s liquidity support for the stock market will come in the form of a 500 billion yuan swap facility and a 300 billion yuan relending facility. Mr Pan said the authorities may add another 500 billion yuan in phases.

“This is probably the most aggressive sentiment booster that the PBOC and market regulators can introduce before the US election,” said senior macro strategist Homin Lee at Lombard Odier Singapore.

“The overall packaging of these measures was done quite well, with helpful guidance for more easing down the road.”

The swap facilities will enable eligible securities firms, funds and insurance companies to use their holdings of bonds, stock exchange-traded funds (ETFs), CSI 300 constituent stocks and other assets as collateral to obtain high-liquid assets such as government bonds and central bank bills from the PBOC.

The swap for more liquid assets “will significantly increase institutions’ ability to acquire funds and buy stocks”, Mr Pan said.

Funds obtained through this instrument can only be used to invest in the stock market, he added.

The relending facility is aimed at guiding commercial banks to provide loans to listed companies and major shareholders for the purpose of buying back or increasing their holdings of shares of listed companies.

This tool is applicable to listed companies with different ownerships such as state-owned enterprises, private enterprises and mixed ownership enterprises.

Beijing has been weighing the formation of a state-backed stabilisation fund since at least October 2023, although some investors doubt its effectiveness, given that previous rescue efforts had limited impact. Sentiment remains depressed as a result of China’s long-running property crisis, weak consumer sentiment and falling prices.

State funds have purchased over US$80 billion worth of onshore ETFs so far in 2024, according to estimates by Bloomberg Intelligence, in an attempt to prop up share prices.

Regulators have also introduced tighter restrictions on short selling and quantitative trading to reduce volatility and prevent a downward spiral.

In April, the authorities announced what analysts said was a once-a-decade capital market reform plan which encouraged firms to boost dividend payments, improve the quality of new stock offerings and plug corporate governance loopholes.

Earlier in February, China appointed Mr Wu Qing as the head of its securities regulator in a surprise move.

Still down more than 2 per cent in 2024, the CSI 300 Index is heading for an unprecedented fourth year of losses. In all, more than US$6 trillion (S$7.7 trillion) has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.

“The measures can raise more funds, increase market liquidity and can also improve market confidence to a certain extent in the short term, but it cannot change the market trend,” said Shenzhen Longhui Fund Management founder and investment director Zhou Nan.

“There is a high probability that in the short and medium term, the market will have to fall further before it bottoms out.” BLOOMBERG