Significant Policy Shift - A New Dawn for China's Economy?

On September 24, the People’s Bank of China (PBoC) announced a reduction in the reserve requirement ratio (RRR) and interest rates, injecting liquidity into the banking system and launching an 800 billion yuan special relending plan aimed at supporting the stock market. 

Just two days later, during the Politburo meeting in September, policymakers clearly stated their intention to prevent a decline in the real estate market, proposing adjustments to housing purchase restrictions and lowering existing mortgage rates, thus instilling hope for a recovery in the property sector.

In light of these significant positive developments, the risk markets reacted enthusiastically. Between the adjustment of monetary policy and September 30, the Hang Seng Index soared nearly 16% over a brief span of just five trading days. Meanwhile, the CN50, which is more sensitive to changes in Chinese policies, surged by an impressive 25%, and the CSI 300 even reached its highest level since 2008.

As bullish traders actively bet on a recovery of the Chinese economy, we can’t help but ponder: What factors contributed to this sudden and large-scale policy adjustment? Will this round of stimulus be more effective in addressing the fundamental issues plaguing economic development compared to previous measures? How long can the robust upward trend in the stock market be sustained? What potential risk events should we keep an eye on in the future?

Deflation Drags Growth: Re-Inflation as the Policy Core

The Politburo meeting in September and the new round of stimulus measures undeniably represent a significant policy pivot, fundamentally reflecting the increasing urgency of Chinese authorities to control deflation and achieve re-inflation.

In my view, many of China’s current economic challenges are closely tied to deflationary effects. For instance, deflation has contributed to a slowdown in economic growth, with GDP failing to reach the 5% target in the second quarter and the manufacturing and service PMIs remaining in contraction territory as of August. This has been accompanied by rising youth unemployment and a tendency for residents to save rather than spend, driven by the prevailing economic downturn.

Regarding social welfare, local government revenues and broad expenditures have been well below budget since the beginning of the year. Some regions may be facing significant financial pressure, with certain institutions cutting civil servant salaries and even suspending basic social expenditures.

In the real estate sector, the economic weakness caused by deflation has led to continuous declines in housing prices. However, due to persistent pessimism towards the housing market, falling prices have not stimulated demand; instead, they have resulted in a tendency for people to adopt a wait-and-see approach, creating a vicious cycle.

To change this situation, the Chinese authorities are now focusing on stabilizing and supporting the stock market through monetary easing policies and liquidity injections, aiming to boost consumer demand and cushion the downturn in real estate.

Short-Term Market Sentiment Boost, Implementation Details Awaited

Over the past year and a half, China has gradually rolled out a series of policies aimed at stimulating the real estate market; however, overall conditions seem to show little significant improvement. I believe that the latest round of support measures has somewhat curtailed the vicious cycle of declining asset prices and weak market sentiment.

Nevertheless, until the specific details of policy implementation, or at least a roadmap for advancement, are clarified, the effectiveness of these measures in revitalizing the real estate market may be quite limited.

Concerns about the transmission effect of policies on the real estate market primarily center around two aspects.

First, local governments lack the motivation and authority to stabilize housing prices through necessary “non-market mechanisms.” Recall that when authorities introduced the real estate relending program in May, public expectations were quite high. However, as the program progressed, we found that rental income was far from sufficient to cover interest payments and operating costs, thereby exacerbating local government debt pressures.

Therefore, I believe that to achieve a recovery in the real estate market, the central government needs to intervene appropriately and implement effective regulations, rather than relying on one problem to solve another. While we have yet to see any specific plans in this regard.

Second, since 2023, the PBoC has lowered interest rates five times and implemented several rounds of policy easing measures, including reducing down payment ratios and lowering housing provident fund loan rates. Although interest rate cuts by developed markets central banks like the Fed and the ECB have provided some flexibility for China’s policy adjustments, the market remains concerned that the current space for monetary easing may be limited, and the policy measures could be relatively mild.

Long-Term Stock Market Growth Relies on Macroeconomic Recovery

After the rapid rise in both the mainland and Hong Kong markets, most traders are caught in a dilemma of fearing adjustments if they chase prices too high, while also worrying about missing out if they don’t act. Considering that on the last trading day before the “Golden Week,” buying activity continued to dominate the China-related indices, the slightly cooled sentiment upon reopening could provide a second wave of momentum for prices. 

Thus, I believe that shorting against the trend is quite challenging at this moment. The authorities’ commitment to providing “unlimited” funds to boost the stock market is likely to create a positive impact on market sentiment in the short term, warranting attention to bullish opportunities.

On one hand, sectors sensitive to declining interest rates, such as the internet and new energy vehicles, are worth watching; on the other hand, sectors with more certain shareholder returns, such as high-dividend stocks, along with the newly emphasized trends of domestic demand and international expansion, also present current upside opportunities.

Nevertheless, the long-term sustainability of the relevant indices and their rebound potential still depend on the macroeconomic recovery. A single interest rate cut is unlikely to resolve demographic challenges. 

As previously mentioned, I believe that China’s persistent deflationary phenomenon stems from a growth model that emphasizes production over consumption. In other words, China’s “dual-speed growth” model relies on support from exports and industry, while domestic demand and real estate are dragging down overall economic development. If this economic development paradigm does not change, the speed of recovery and the duration of the bull market will be significantly constrained.

Key Concerns and Potential Risks

As the public gradually interprets the policy guidelines, the scale and specifics of the upcoming stimulus measures become crucial.

The NPC Standing Committee meeting scheduled for October may provide relevant information to the market, including details on swap tools and relending plans. Given the financial conditions of local governments, we also look forward to the central government announcing a supplementary budget to expand the consumption replacement program, promote social spending, and alleviate the debt burden on local governments.

I firmly believe that the key to alleviating the difficulties in the real estate market lies in restoring confidence in economic development and reducing precautionary savings, enabling the public to spend with peace of mind. Therefore, the fiscal support during the March 2025 NPC meeting in the housing and social welfare sectors deserves close attention.

On the flip side, excessive government intervention may raise concerns among traders about liquidity. This is particularly pertinent for the Hong Kong market, which is more reliant on foreign capital, potentially leading to international capital outflows.

From an external market perspective, the risks associated with the U.S. elections cannot be overlooked. While Chinese authorities actively promote stimulus policies, the election outcomes will create uncertainties regarding trade tariffs, investment restrictions, and supply chain de-risking for China, leading to fluctuations in the stock market.