Will China’s $100bn war chest for shares lift the real economy?

While Chinese markets have welcomed the “unprecedented” measures promised by the Chinese government in the short term to stabilize capital markets and revive animal spirits, the bigger concern is whether the measures will be enough to stimulate the sluggish real economy.

The People’s Bank of China on Tuesday announced a war chest of 800 billion yuan ($114 billion) to stimulate the stock market by lending loans to asset managers, insurers and securities firms to buy shares and lending to listed companies to buy back their own shares.

People’s Bank of China Governor Pan Gongsheng told a briefing with financial regulators that this was the first time the central bank had made “innovative” use of this type of monetary policy tool to support capital markets.

If the plan proves successful, that amount could be doubled or even tripled. Policymakers have also floated the idea of ​​an “inventory stabilization fund,” but few details have been released.

The move amounts to one of the biggest bazookas the People’s Bank of China has aimed at China’s stock market, which has slumped over the past four years and reflected a lack of confidence in the country’s struggling economy.

Following the announcement, China’s CSI 300 index, which is made up of stocks listed in Shanghai and Shenzhen, which had fallen more than 40% since 2021, rose 4.3% to its highest level since July 2020.

It rose 2.1% on Wednesday in a broad-based rally, while the yuan strengthened 0.5% against the dollar to just above 7.01, its highest level in more than a year.

The loan program to support stock prices is part of a package of stimulus measures from the People’s Bank of China that includes cuts to benchmark interest rates, mortgage rates and down-payment requirements. This follows a sharp 50 basis point interest rate cut by the Federal Reserve last week, giving the central bank more room to maneuver.

“These measures exceeded market expectations,” said Ding Shuang, chief China and North Asia economist at Standard Chartered Bank. “This may signal the beginning of more aggressive policy measures compared to the past, when people were unhappy with incremental policy responses.”

But, “we still [the programmes] to assess its impact on the market,” Ding said.

“There were some novel ideas, particularly around lending and swap facilities,” said Jason Lui, head of Asia-Pacific equity and derivatives strategy at BNP Paribas.

The new swap facility allows nonbank financial companies to borrow from the PBOC against bonds, stocks and exchange-traded funds to buy shares. The re-lending program provides low-interest loans to commercial banks that can then lend them to companies looking to fund share buybacks to boost share values.

Economists suggested the purchase incentives were aimed at boosting holdings by the so-called state team of state-owned financial institutions, which bought billions of dollars’ worth of mainland-listed shares earlier this year in a bid to buoy the market.

Wu Qing, chairman of market supervision at the China Securities Regulatory Commission, said at a briefing on Tuesday that institutional investors’ share of the free float of mainland-listed A-shares had increased from 17% to 22.2% by the end of August compared with 2019.

But he said there was still a “shortage” of medium- to long-term capital in a market where sudden movements in individual investor funds often affect stock sentiment.

“The spirit of the program is directed at other financial institutions that are currently reluctant to increase their allocations to equities,” BNP’s Louis said.

“It depends on whether the fund is willing to borrow from the People’s Bank of China to buy the shares and whether it is willing to bear the losses if share prices fall,” Ding added.

Beijing sees the stock market as a clear signal of a healthy economy and a key tool for managing social stability.

Morgan Stanley analysts said the stimulus package represents 3% of China’s A-share market’s total free float and called the measure a “completely positive move.” But they warned that the new measures will not be enough for China’s overall recovery.

“Improved market sentiment and the longer-term sustainability of the rebound depend heavily on a macroeconomic recovery and a bottoming out of corporate earnings growth,” they said.

Economists said Tuesday’s stimulus measures were key, especially the simultaneous cut in the benchmark interest rate and reserve requirement – the amount of reserves lenders must hold. Pan said even a 0.5 percentage point cut in the reserve requirement would increase liquidity by 1 trillion yuan.

But most analysts said only a big fiscal stimulus package that could stabilise China’s long-running property slump and directly benefit households would help revive confidence and stave off deflation.

The People’s Bank of China announced measures that effectively slashed interest rates on a 300 billion yuan plan to buy up unsold homes, but the plan has struggled to get off the ground.

Robert Gilhooly, senior emerging markets economist at Abdul Latif Natal, said Tuesday’s interest rate cut for existing mortgage holders was “the closest thing we’ve seen to a fiscal transfer to households yet”.

But ultimately, the government will need to inject more public funds to rescue the property sector, or household spending will “remain constrained by negative wealth effects from falling house prices and a weak labor market,” he said.