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on september 27, the reserve requirement ratio and interest rate cuts that were warmed up at the beginning of this week were officially implemented. the capital market remained active. a shares and hong kong stocks rose by nearly 1% and 2% respectively. the offshore rmb rose above 7 again. the inflow momentum of overseas hedge funds continued. reduce.

rrr cuts and interest rate cuts were implemented quickly

the central bank decided to lower the deposit reserve ratio of financial institutions by 0.5 percentage points starting from september 27 (excluding financial institutions that have implemented a 5% deposit reserve ratio). after this reduction, the weighted average deposit reserve ratio of financial institutions will be approximately 6.6%. at the same time, the central bank announced that in order to increase the counter-cyclical adjustment of monetary policy and support stable economic growth, starting from september 27, the open market 7-day reverse repurchase operation interest rate will be adjusted from the previous 1.70% to 1.50%.

goldman sachs predicts thatthere will be another rrr cut of 25 bp in the fourth quarter of this year, and the forecast for further rrr cuts and interest rate cuts in 2025 is maintained. it is expected that the first and third quarters of 2025 will each see a 25 bp rrr cut, and the interest rate cut will be 10 bp each in the second and fourth quarters.

liu tao, a senior researcher at the guangkai chief industry research institute, told reporters that the central bank's timely measures to cut the reserve requirement ratio and interest rates have four major significances: first, it releases long-term liquidity. after this reduction, it is expected to provide long-term liquidity to the financial market of about 1 trillion yuan. yuan; secondly, it will help to promote the further decline of market interest rates. when the demand for funds is certain, the use of other monetary policy tools such as lowering the interest rate, lowering the medium-term lending facility (mlf) interest rate, open market operations, etc. can play a role in promoting the role of the continued downward trend in real interest rates; the third is to improve the current liability situation of the banking system, effectively alleviate the pressure on banks to reduce their net interest margins, enhance the ability to support real enterprises in credit extension, and better serve the real economy; the fourth is to provide support to the market and to the real economy. the society has conveyed more positive policy signals, which will help boost the confidence of all parties and alleviate many potential risk pressures in the market.

judging from the room for rrr cuts, after this reduction, the weighted average deposit reserve ratio of medium-sized banks is 6.0%, and the weighted average deposit reserve ratio of large banks is 8.0%, both of which have sufficient room for further reductions.

although interest rates have dropped and liquidity has increased, the rmb exchange rate has not been affected and has risen instead of falling.the recent surge in overseas hedge fund inflows may also boost the exchange rate.as of 10:20 on september 29, usd/offshore rmb was at 6.9962, and usd/onshore rmb was at 7.0152.

song yu, chief china economist at blackrock, told china business news: "the weakening of the u.s. dollar will help push up the renminbi. china's interest rate cuts do not mean that the renminbi will weaken. when the domestic economic recovery improves, the renminbi will tend to rise. vice versa, if economic fundamentals or economic expectations are not good, even a large interest rate difference will not help the exchange rate.”

fiscal policy “follow-up” expectations are rising

on the afternoon of september 26, the politburo meeting of the central committee of the communist party of china proposed "to promote the real estate market to stop falling and stabilize." institutional insiders believe that this is the first time in many years that the politburo meeting has clearly stated policy requirements related to the operation of the real estate market, further stimulating the market. rushing higher, the shanghai composite index broke through the 3,000-point mark in one fell swoop, rising 3.61% that day.

wang tao, head of asia economic research and chief china economist at ubs, said: “the meeting proposed stabilizing the real estate market for the first time, and the specific implementation will be key. we are not convinced that major adjustments to destocking projects or financing are about to occur, and credit to developers will "support is likely to increase significantly."

in addition to the real estate market, the market's focus is currently on the fiscal stimulus that is expected to be launched in the future.

wang tao told reporters that the politburo meeting expressed a clear policy tone, including the need for "countercyclical fiscal policy," which has raised market expectations for substantive fiscal stimulus.

"we estimate that the overall fiscal tightening in the first half of the year accounts for about 0.4% of gdp, while the annual fiscal expansion implied by the national people's congress meeting in march is 0.8%~1%. local governments have cut general expenditures. in the face of reduced fiscal revenue and strict control of local governments, the situation of financing platform debt may increase the amount owed to enterprises and strengthen tax collection, which is not good for the economy. if more central government bonds are issued to support consumption and alleviate the financial difficulties of local governments, it will help. economic growth will be stable during the rest of this year and early 2025," wang tao said.

song yu said that the pace of policy introduction is very critical. "the meeting of the standing committee of the national people's congress in october is more critical. if we want to increase the issuance of government bonds and increase the deficit ratio, we need to go through this process, and fiscal power will be needed in the future to reverse economic expectations."

wang ju, head of foreign exchange and interest rate strategy for bnp paribas greater china, also mentioned that financial follow-up will be key. with central bank governor pan gongsheng specifically mentioning the need to "coordinate with proactive fiscal policy," "we believe the possibility of additional fiscal stimulus has increased. the next key window will be the national people's congress standing committee meeting at the end of october, when 10,000 yuan may be approved." with the additional issuance of treasury bonds of rmb 100 billion to rmb 2 trillion, the central bank’s mentioned room for further rrr cuts of 25 to 50 bp during the year in addition to the 50 bp rrr cut may be aimed at catering to this; as the national development and reform commission launched a series of ' incremental policy, additional government bonds may be used as a source of funds. in addition, the possibility of potential government bond proceeds being used to increase the tier one capital of major commercial banks is not ruled out.”

overseas hedge funds continue to increase their positions in the chinese stock market

smart money or hot money, such as hedge funds, are often the first to respond to policy changes. this time is no exception.

china business news reported on september 24 that overseas hedge funds with ultra-underweight chinese assets began to pour in, and a fear of missing out on the rising market began to spread.

sources from prime book (pb), a u.s. investment bank, told china business news that demand for chinese stocks has hit record highs. on the 24th, the overall net buying of chinese stocks on pb trading hit the highest single-day level since march 2021 and the second highest in the past 10 years, driven almost entirely by long buying.

on the 25th, institutions stated that they continued to see buying demand for chinese stocks from fund clients. goldman sachs said that chinese stocks have been bought by goldman sachs pb business (macro managers, quantitative and multi-strategy managers, that is, short-term traders) for 8 consecutive days, but traditional long-term investors (long-only) have not yet started to act. this group may be forced to increase their positions.

currently, the allocation of overseas institutions to chinese stocks is at a historically low level, which has also led to the strong momentum of increasing positions this time. as of the end of august, global mutual funds' overall allocation to chinese stocks was 5.1%, which was in the first percentile of the past decade and at an extremely low level; from an asset-weighted perspective, actively managed mutual funds' allocation to chinese stocks the allocation is still 310 basis points below the benchmark; in goldman sachs pb business, the total and net positions in chinese stocks are still very low, at the seventh and 14th percentiles respectively on the 5-year lookback. hedge funds had less than 7% allocations to chinese stocks before the recent rally, a nearly five-year low.

how long will the rebound last? in this regard, goldman sachs china equity strategist liu jinjin mentioned in a report that until the problems in the real estate market are resolved, chinese stocks may still be "short-term bids." while the refinement of the housing destocking program may modestly improve the financing conditions for some local governments when purchasing land banks and vacant homes, the overall intensity of state support and capital deployment appears to be lacking so far. goldman sachs estimates that the value of excess inventory nationwide may be as high as 8 trillion yuan. catalysts for a mid- to long-term recovery in capital markets will be that markets need to feel confident in the scale and effectiveness of housing relief policies (i.e. fiscal stimulus through refinancing or mortgage supplementary loan (psl) schemes), or see signs that the current cycle is approaching finish.

in the short term, most institutions believe that the tactical short-term rebound may not be over yet. goldman sachs recommends participating in chinese market investments until the index is revalued upward to close to the agency’s fair price-to-earnings ratio target of 10.3 times (implied upside of 11%) or rebounds beyond the last short-term highs in april and may (implied upside) space 14%). morgan stanley believes that technically, china's csi 300 index may still have room to rise by about 10% in the short term. the research report released by the agency stated that the stimulus measures announced by china earlier this week were "very positive". what really surprised the market were the market stabilization measures, which can be said to be unprecedented.