China’s Stimulus Boost: Policy Focus and Stock Market Outlook

The market's response has been largely positive. After a significant drop of over 12% in the Hang Seng Index during the first two trading days post-Golden Week, and a nearly 18% pullback in the CN50, these latest policy updates have instilled renewed confidence, significantly reducing the downward momentum of both indices. While the selling pressure has largely eased, the upside momentum remains somewhat limited.

As Chinese and Hong Kong stocks digest the latest developments, market participants are closely watching for key takeaways from this new stimulus package. What are the focal points? Why are bullish investors showing reluctance to engage? And what trajectory might the relevant indices follow in the coming period? Additionally, what potential risk events should be on the radar?

SFISF - Balancing Bond Markets, Equities, and Liquidity

The SFISF, a new structural monetary tool created by the PBoC, essentially provides financing facilities to non-bank financial institutions. This is aimed at stabilizing the secondary market and balancing the bond, stock, and liquidity environments. In my view, it bears some resemblance to the Term Securities Lending Facility (TSLF) introduced by the Fed during the GFC.

In simple terms, this tool allows these institutions to pledge less liquid assets such as corporate bonds, equity ETFs, and even CSI300 component stocks to the central bank, in exchange for more liquid assets like government bonds and PBoC bills, which can then be reinvested into the stock market.

The key innovation here is the "swap mechanism." Instead of directly injecting capital into the stock market, the central bank aims to maintain a balance across markets by swapping.

For example, if a fund company is under pressure due to a liquidity squeeze, it would previously have had to sell stocks to raise cash, potentially triggering a cascade of similar trades and sharp market declines. Now, with the SFISF, the company can pledge its stocks in exchange for government bonds, which can then be used in reverse repo operations to secure short-term liquidity—something that wasn't possible before because stocks couldn’t be used as collateral for reverse repos.

In another scenario, if stock markets tumble and risk-averse investors flock to the bonds, driving bond prices up, a fund company can sell its newly acquired government bonds at high prices and use the proceeds to buy stocks at lower levels. This could not only curb irrational bond market rallies and push up real yields but also support stock market performance, creating a self-balancing mechanism across markets. 

In short, I believe the SFISF serves a dual purpose: enhancing liquidity for non-bank financial institutions while maintaining a balance between the bond and stock markets.

MoF Announcement - Increasing Leverage and Mitigating Risks

When it comes to the MoF’s announcement, one of the main talking points among traders is the emphasis by Minister Lan Fo’an that there is ample room in the central budget to increase debt and fiscal deficits. This signals the government’s firm commitment to increasing leverage and ensuring accommodative policy over the next two years. With this clear direction set, we can expect more detailed plans and policies to follow.

Another key takeaway, in my view, is the focus on risk mitigation and addressing deflationary pressures.

First, mitigating local debt risks: The MoF’s plan includes debt swaps to convert local governments' hidden debt into explicit debt. Over the past two years, local governments have been required to address their debt issues independently. However, falling land sales revenues have forced some local entities to cut wages, overtax, or delay payments to businesses, all of which have worsened unemployment and dampened consumer confidence.

By swapping high-interest debt for lower-interest debt, the central government not only improves local fiscal conditions but can also use the savings on interest to subsidize residents and pay overdue debts to companies, thereby boosting employment and consumption, which could help alleviate deflationary pressures.

Second, stabilizing the property market: I see this as a continuation of the PBoC’s relending program in May policy. Initially, the central bank raised its stake from 60% to 100%, channeling funds through 21 national banks to state-owned enterprises (SOEs) to purchase unsold housing inventory. The MoF’s new plan allows local governments to directly purchase housing and land, providing more flexibility and potentially improving liquidity for property developers.

Third, mitigating margin compression risks by recapitalizing banks: Under policy easing, the MoF will issue 1 trillion RMB in special treasury bonds to bolster banks’ Tier 1 capital, ensuring the stability of the financial system.

Fourth, safeguarding social welfare, basic public services, and wages: The MoF announced an additional 400 billion RMB in local bond issuance to address revenue shortfalls and strengthen local fiscal autonomy.

Stimulus Focused on Real Estate, Insufficient Bullish Momentum

The limited rally in equity indices is likely due to two primary concerns: the absence of concrete stimulus figures and the lack of measures aimed at boosting consumption and domestic demand.

First, the fiscal budget needs to be approved at the end of October by the NPC Standing Committee, which falls outside the remit of the PBoC and MoF. I believe that this temporary lack of details is not a major threat to bullish sentiment in the stock market. Second, the PBoC and MoF are currently prioritizing risk mitigation and capital market stability, with consumption stimulus taking a back seat. We could see more details after the October meeting.

In summary, the latest round of stimulus measures is unlikely to have a material impact on most companies outside of the real estate sector. I expect the A shares and Hong Kong stocks to remain range-bound without significant updates before the end of the month. Traders will likely reprice their expectations for China’s economy and adjust their positions based on the outcome of the October meeting.

Key Events to Watch: October NPC Standard Committee, Core Economic Data & US Election

For China-related stock indices, I see two major internal risks worth monitoring.

The first is the NPC Standing Committee meeting at the end of October. Finance Minister Lan Fo’an mentioned that “…this is the largest debt restructuring effort in recent years.” Given that the largest in history was the 4 trillion RMB stimulus package in 2008, and the past three years have seen several 1 trillion RMB in bond issuance, I expect the end-of-month meeting to announce a supplementary budget of 2-4 trillion RMB for local debt restructuring and bank recapitalization.

The second risk lies in core economic data for November and December, such as CPI and retail sales. Should additional details on consumption and capital market liquidity emerge, reflected in indicators like month-on-month CPI rising to 1% or year-on-year retail sales growth reaching the annual average of 3%, I believe this could provide solid upward momentum for the stock market over the medium term. However, the fundamental recovery of market sentiment depends on the performance of the real estate market—a relatively long process, with stabilization being just the first step.

Moreover, traders should also be mindful of potential shocks to Chinese equities stemming from the US presidential election. With Trump’s polling numbers on the rise, a successful bid for the presidency could lead to a resurgence of his tough tariff policies on China, potentially forcing China to seek new trade partners in Europe and Australia. This shift could negatively impact China’s export industry, weigh on market sentiment, and dampen stock performance.