a shot in the arm to stabilize the market
2024-10-01
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(the author of this article is xu gao, chief economist of boci securities)
last week, the a-share market surged, driven by domestically-unexpected easing policies. there are two reasons behind the surge in the stock market: first, the unexpected easing policy introduced last week has significantly changed the market's expectations of the policy response function, thereby effectively reducing concerns about the medium- and long-term growth prospects of our country's economy, thus significantly improving the market. confidence. second, the two structural monetary policy tools created by the central bank, "securities fund insurance swap facility" and "stock repurchase, increase and re-lending", have changed the logic of the operation of the a-share market to a certain extent, and the trend of a-shares will be more affected. liquidity impact.the easing policy introduced last week should not have such a significant effect in stabilizing short-term economic growth soon. it is now approaching the fourth quarter, and it is difficult for the effect of loose policies to be reflected in this year’s economic data. what's more important is that the currently announced easing policies are more biased towards monetary policy, and the details of the easing fiscal policy have not yet been announced. in terms of stabilizing economic growth, the current easing of fiscal policy is more important than the easing of monetary policy. to what extent fiscal policy will be relaxed, especially how much additional bonds the central government will issue, is a key observation point for the next policy.the intensity of fiscal easing will also determine the subsequent trend of domestic interest rates: if the intensity of fiscal easing is greater, the economy will improve and interest rates will rise; if the intensity of fiscal easing is insufficient, the weak economic situation will continue and the downward trend in interest rates will be difficult to reverse.last week (september 23 to 27), the a-share market rose sharply driven by domestically-unexpected easing policies.in the five trading days last week, the shanghai composite index rose by 12.8%, the largest weekly increase since december 2008. affected by this, hong kong's hang seng index also surged 13% last week, the largest weekly increase in the past 20 years.
what first ignited market enthusiasm was the press conference held by the state council information office on september 24[1].at the meeting, leaders from the people's bank of china, the state administration of financial supervision and the china securities regulatory commission announced interest rate cuts and reserve requirement ratios, lowered existing housing loan interest rates, replenished core tier one capital for the six major banks, and created a 500 billion yuan "securities fund insurance swap facility." and 300 billion yuan of "stock buybacks, holdings, and re-loans" and other loose policies. while the press conference was still in progress, the market had already started to rise significantly. in the end, the shanghai composite index rose 4.15% that day.
on september 26, the political bureau of the central committee held an extraordinary meeting to discuss economic work.according to past practice, the political bureau of the central committee usually holds meetings dedicated to discussing economic work in april, july and december every year. it can be seen from the timing of the meeting that this politburo meeting is unusual. judging from the communiqué issued after the meeting,the party central committee is highly concerned about the downward pressure on economic growth and requires "face up to difficulties, strengthen confidence" and "strive to complete the economic and social development goals and tasks throughout the year." at the meeting, the party central committee deployed various easing policies, requiring both fiscal and monetary policies to be relaxed, to promote the real estate market to stop falling and stabilize, and to strive to boost the capital market. for this politburo meeting, the capital market once again responded with warm applause, and the shanghai composite index rose 3.61% that day.
on september 27, the people's bank of china announced a 0.5 percentage point reduction in the deposit reserve ratio. although this policy was announced at the state council information office press conference three days ago, the implementation of the measures still caused the shanghai composite index to surge by 2.89% that day.
for two reasons, the intensive release of easing policies last week has a significant boost to the capital market.
first, the larger-than-expected easing policy introduced last week has significantly changed the market's expectations of the policy response function, thereby effectively reducing concerns about the medium- and long-term growth prospects of the chinese economy, thus significantly improving market confidence.macroeconomic forecasts must be based on certain assumptions about macroeconomic policy response functions. in other words, we must know how macroeconomic policies will adjust as the economic situation changes, in order to predict the economic trends under macroeconomic policy control. this is especially true in our country where the government has considerable influence on economic operations. the introduction of last week's easing policy has changed the market's expectations for my country's policy response function in two important aspects.
first, last week’s policy strengthened expectations that the policy will maintain the bottom line of economic growth.before the introduction of easing policies last week, many people in the market believed that macroeconomic policies seemed to be slow to respond to the downward pressure on economic growth, and that the policies to stabilize growth were not strong enough. this has caused some market participants to doubt the determination and ability of macroeconomic policies to maintain the bottom line of growth, and further suspect that my country may have entered a long-term slowdown in economic growth. the politburo meeting on september 26 showed that the party central committee is highly concerned about the downward pressure on the economy and is not satisfied with the slowdown in economic growth and the fact that this year's economic growth may not reach the 5% growth target set at the beginning of the year. this has given the market a clearer understanding of the determination of senior leaders to maintain the bottom line of growth, thus significantly alleviating expectations that economic growth will continue to decline in the medium to long term.
secondly, last week's policy also changed expectations of a slow policy response.for a long time from last year to this year, the introduction of my country's macroeconomic stabilizing growth policies was more like "squeezing out toothpaste", always being forced out under the pressure of economic downturn. experience at home and abroad has long shown that a "toothpaste-squeezing" style of policy release is unlikely to be very effective, and will always make policies lag behind changes in the economic situation (behind the curve). a more effective way to release policies is to adopt a "shock and awe" strategy, focusing on releasing unexpected policies to shock the market. even if the policy content is the same, the "shock strategy" will be much more effective than "squeezing toothpaste". obviously, the release of easing policies last week was not a "squeeze of toothpaste", but a concentrated introduction of multiple policies, which surprised the market. such a policy release method will obviously be more effective.
it should be noted that the effects of changes in the macro policy response function are unlikely to be reflected in this year’s economic data. it is now approaching the end of the third quarter, and there is only one quarter left in the fourth quarter to reflect the effect of loose policies in the real economy. moreover, winter is about to enter our country, and investment activities in the northern region will also be affected by winter. therefore, last week's release of loose policies is unlikely to significantly change the market's forecast for this year's economic growth. however, we cannot therefore ignore the impact of changes in the policy response function on the capital market.what determines the performance of the capital market is not only the current economic situation, but also expectations for longer-term economic trends. after the market's expectations that my country's medium- and long-term economic growth will continue to decline have significantly weakened, even if this year's gdp growth forecast does not change much, the capital market should also strengthen significantly.
second, the two structural monetary policy tools created by the central bank, "securities fund insurance swap facility" and "stock repurchase, increase and re-lending", have changed the operation logic of the a-share market to a certain extent. in the past, the a-share market was the result of economic operation, not the cause of economic operation.in my country's total social financing, the proportion of stock financing has always been very low. from 2016 to 2023, domestic stock financing of my country's non-financial enterprises accounted for only 3% of total social financing. in the first eight months of 2024, this proportion has further dropped to 0.7%. since the amount of stock financing is very low, the rise and fall of the stock market has little impact on my country's macroeconomics. but in turn, macroeconomic changes have a significant impact on the stock market. in the past ten years, except for the stock market bubble and "stock market crash" periods in 2014 and 2015, the growth rate of the shanghai composite index has been highly positively correlated with the manufacturing pmi that reflects my country's economic prosperity in the long term - the quality of the economy obviously affects the a-share index. trend. therefore, the slowdown in my country's economic growth in the first half of this year will naturally lead to a decline in the a-share stock index. (chart 1)
before last week, the a-share market was already in an abnormally weak state due to the decline in economic growth and the weakening of expectations for the medium- and long-term economic prospects.since the beginning of this year, due to the weak financing needs of the real estate industry and local governments, the liquidity transmission path from my country's financial market to the real economy has been blocked, and a large amount of funds have accumulated in the financial market, forming an obvious "asset shortage" phenomenon, resulting in domestic bond income the rate hit a new low in the past decade. however, in a financial market with abundant liquidity, the a stock market has experienced capital outflows due to weak expectations, and has instead become an "isolated island" with abnormally weak liquidity in the "ocean" of funds.
one evidence of this is the divergence between the shanghai composite index and domestic credit spreads this year. theoretically, the credit spreads of stock indexes and credit bonds reflect the preference of financial market investors for risky assets. when investors prefer risky assets, on the one hand they will tend to buy more credit bonds in the bond market, thereby compressing credit spreads; on the other hand, they will also buy more stocks, thereby pushing up the stock index. therefore,credit spreads and stock indexes should move in opposite directions. when credit spreads narrow, stock indexes rise. but this year, my country's credit spreads have compressed to a new low in the past 10 years due to the "asset shortage", indicating that investors are purchasing risky credit bonds on a large scale. but on the other hand, the shanghai composite index fell significantly, reflecting the outflow of funds from the stock market. (chart 2)
against this background,the central bank's newly established two tools, "securities fund insurance swap facility" and "stock repurchase, increase and re-lending", are like two channels for introducing liquidity into the a-share market. they themselves will bring the central bank's influence to the a-share market. liquidity supply will also drive the flow of market funds to the a-share market.at the press conference of the state council information office on september 24, pan gongsheng, governor of the people’s bank of china, also said: “we plan to have an initial operation scale of 500 billion yuan for the swap facility, and the scale will be expanded depending on the situation in the future. chairman wu qing and i speaking of which, as long as this thing is done well, the first phase of 500 billion yuan, another 500 billion yuan, and even the third 500 billion yuan can be raised. i think it is all possible. our attitude is open to this. the funds obtained from this instrument can only be used to invest in the stock market. "in terms of "stock repurchase, holdings, and re-loans," governor pan's attitude is similar: after the first tranche of quota is used up, there can be a second tranche and a third tranche. expect. you know, the central bank has unlimited nominal money creation capacity. such a statement by the governor of the central bank gave the market a lot of room for imagination.
under the new situation where central bank liquidity is connected with the a-share market, liquidity may have a greater influence on the operation of a-shares. this is quite different from the past logic of "the a-share market is the result of economic operations". when the real economy's restraint on the trend of the a-share stock index decreases, it will be easier for the stock index to rise.
but,although the easing policy introduced last week has significantly boosted the capital market, it should not have such an obvious effect in stabilizing short-term economic growth soon.on the one hand, as mentioned above, the fourth quarter is approaching, and winter is about to begin in northern my country, so the effect of loose policies will not be easily reflected in this year’s economic data. on the other hand, the more important aspect is that the currently announced easing policies are more biased towards monetary policies, and the details of the easing fiscal policies have not yet been announced. in terms of stabilizing economic growth, the current easing of fiscal policy is more important than the easing of monetary policy. therefore, to what extent fiscal policy will be relaxed, especially how much additional bonds the central government will issue, is a key observation point for the next policy.
since the beginning of this year, the financing needs of my country's real economy have obviously lost interest rate sensitivity.on the one hand, interest rates have dropped to their lowest level in more than a decade. on the other hand, the financing demand of the real economy has not expanded accordingly. this is in sharp contrast to the trend in the past few cycles where social financing growth has expanded as interest rates have fallen. this shows that my country's current financing transmission from the financial market to the real economy has been blocked. in this case, although loose monetary policy can increase liquidity in the financial market, it is difficult to drive the expansion of demand in the real economy. currently, what is more needed to stabilize economic growth is to find economic entities in the real economy that can increase spending (borrow money) in a counter-cyclical manner. (chart 3)
currently, my country's real estate industry is under downward pressure on sales and housing prices. at the politburo meeting on september 26, although the party central committee clearly requested that "the real estate market should be promoted to stop falling and stabilize," it also requested that "the increase in commercial housing construction must be strictly controlled." under the guidance of policies that strictly control increments, investment in commercial housing may not improve, and financing demand from real estate developers may not increase significantly. it also needs to be observed how willing the residential sector is to increase leverage after the introduction of this easing policy. in addition, local governments are currently facing strong "debt" constraints and limited financing. in this way,the central government is probably the only economic entity in my country's real economy that is capable of large-scale counter-cyclical leverage, so it is naturally the only choice for stabilizing economic growth. for the current round of policy relaxation to have a significant effect on the real economy, the central government needs to significantly increase the scale of bond issuance and expenditure.at the politburo meeting on september 26, the party central committee requested that “ultra-long-term special treasury bonds and local government special bonds must be issued and used to better play the role of government investment in driving”, giving the market expectations of fiscal expansion.
at an economic forum held at renmin university of china on september 21, liu shijin, former deputy director of the development research center of the state council, proposed the idea of a two-year fiscal stimulus of 10 trillion yuan [3]. if the next fiscal easing can be close to this magnitude, the stabilization and recovery of real economic growth will be just around the corner. however, if the scale of fiscal easing is significantly lower than this level, the downward pressure on economic growth may not be significantly subsided. therefore, to what extent the current loose policy can lead to the stabilization of real economic growth remains to be seen as to the intensity of fiscal easing in the future.the intensity of fiscal easing will also determine the subsequent trend of domestic interest rates: if the intensity of fiscal easing is greater, the economy will improve and interest rates will rise. on the other hand, if fiscal easing is insufficient, the weak economy will continue and the downward trend in interest rates will be difficult to reverse.
to sum up, last week's more-than-expected easing policy will significantly boost the sentiment of the capital market, but whether it can drive the growth of the real economy to stabilize remains to be seen from the next trend of fiscal policy. considering the liquidity that the central bank's new structural monetary policy tools will bring to the a-share market, the a-share market can rise independently of the conditions of the real economy to a certain extent. although this rise may be considered to contain elements of an asset price bubble, for two reasons, this rise should also be reasonable and sustainable.
first of all, the early decline of the a-share market was not only due to the weakening of short-term economic growth, but also largely due to the expected disorder of the macro policy response function. the politburo meeting on september 26 has clearly reshaped this expectation and improved the confidence of all parties in the medium- and long-term economic growth prospects. this should naturally be reflected in the a-share stock index. secondly, as a price indicator that all parties pay attention to, the a-share stock index is a more important expected weather vane. the decline of the a-share stock index can easily increase the market's pessimistic expectations and even form a vicious cycle in which pessimistic expectations self-fulfill. considering such risks, it is reasonable for the government to take measures to stabilize the a-share index. this should be a factor that the central bank will consider when creating two structural monetary policy tools that are beneficial to a-shares.
but,after experiencing the “stock market crash” caused by the bursting of the stock market bubble in 2015, stock market asset price bubbles will be a risk that financial regulators will focus on preventing. therefore, after this easing policy drives up the surge in a-shares, regulators must consciously control the liquidity of the stock market to prevent asset price bubbles from expanding in the market.this year, under market pressure, the scale of equity financing in the a-share market has dropped significantly. in the first eight months of this year, the total domestic equity financing of my country's non-financial enterprises was only 157.6 billion yuan. in the first eight months of 2021, 2022 and 2023, the total amount of stock financing was 737 billion yuan, 771.7 billion yuan and 641.7 billion yuan respectively. compared with the same period in the previous three years. the scale of equity financing shrank significantly in the first eight months of this year. after the liquidity of the a-share market improves, the scale of stock financing in the a-share market is bound to gradually expand under the guidance of regulators. in this way, on the one hand, stock market funds can be introduced into the real economy and the stock market can better play its role in supporting the growth of the real economy. on the other hand, it can also reduce the degree of capital accumulation in the stock market and reduce the risk of asset price bubbles. in the future a-share market, there may be a situation where regulators conduct "range management" on stock indexes based on the control of capital inflows (through structural monetary policy tools) and outflows (stock market financing). (over)
[1] people's bank of china, "the state council information office held a press conference to introduce financial support for high-quality economic development", http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/5466659/index.html.
[2] xu gao, july 21, 2024, "policy options for stabilizing growth", https://finance.sina.com.cn/zl/china/2024-07-22/zl-inceyhuf9155160.shtml.
[3] liu shijin, september 21, 2024, "proposal to launch a 10 trillion economic stimulus plan", https://finance.sina.com.cn/zl/china/2024-09-21/zl-incpxnci0015984. shtml.
this article represents the views of the author only.
