Chinese stocks soar on stimulus plan. Can the rally continue?

By Jamie Chisholm

China stimulus package is most significant since pandemic, economist says

China's stock market surged the most in more than two years and industrial commodity prices bounced after Beijing on Tuesday unleashed a swathe of stimulus measures intended to revive the world's second biggest economy.

But amid the euphoria there was skepticism among many observers that the pledges would provide a sufficient economic boost or spark a sustained stock market rally.

People's Bank of China governor Pan Gongsheng said in a rare public briefing that a short-term interest rate would be cut, the amount of capital banks were required to hold in reserve would be reduced, and there would be a batch of support for the beleaguered housing sector and the struggling equity market as the government strived to lift economic growth to its 5% annual target.

"This is the most significant PBOC stimulus package since the early days of the pandemic," said Julian Evans-Pritchard, head of China economics at Capital Economics.

Traders were impressed, with commodities that are normally highly sensitive to expectations about Chinese demand attracting buyers. The NYMEX copper contract (HG00) rose 2.3% to $4.447 a pound, a two-month high, while the Brent crude oil contract (BRN00) rose 1.2% to $74.10 a barrel.

Equity investors were particularly energized, pushing the CSI 300 index XX:000300 up 4.3%, its best day since March 2022, and boosting Hong Kong's Hang Seng HK:HSI by 4.1%.

In premarket trade, JD.com (JD) stock jumped 7% as Alibaba (BABA) rose 5%.

The gains filtered to companies outside of China as well. Tesla shares (TSLA) rose 2% in premarket trade, as LVMH (FR:MC) and Burberry (UK:BRBY) were among the luxury-goods companies rallying in Europe.

Freeport-McMoRan (FCX) and Southern Copper (SCCO) gained in premarket trade.

Still, the CSI 300 remains down 9% for the year and nearly 40% below its peak seen in early 2021, a dire run that reflects investors fears about slowing growth in the Chinese economy amid the damage reaped on consumption by a drawn-out property crash.

The PBOC's stimulus proposals sought to address the sclerotic housing sector in particular, telling banks to reduce mortgage rates by 0.5%, and lowering the minimum down-payment ratio to 15% for second-home buyers, from the current 25%.

Furthermore, the PBOC will allow commercial banks to use 100% from the 300 billion yuan ($43 billion) relending loan facility to finance loans they offer to state-owned firms for acquiring unsold flats for affordable housing, up from the current 60%.

Broader measures to encourage bank lending and borrowing included cutting the seven-day reverse repo rate by 0.2 percentage points to 1.5%, and banks' reserve requirement ratio by 50 basis points in the near future, which the PBOC said would free up about 1 trillion yuan ($142 billion) for new lending.

And there was direct support for the stock market, too, with the PBOC saying it will set up a 500 billion yuan swap facility that insurance companies and asset managers, amongst others, can tap to invest into equities. Also, there will be a 300 billion yuan lending program to help companies buy back their stock.

Fiscal measures needed: Goldman analysts

The measures were positive for markets given their unprecedented nature, according to Laura Wang, equity strategist at Morgan Stanley.

"We expect both the onshore A-share market and the offshore space to react positively to this development, and could potentially lead to a tactical rebound rally and even outperformance vs. the EM market in the near term," Wang added.

However, many analysts were unsure that the new package would be sufficient to meaningfully revive China's economy, or provide sustained gains for the country's stock market.

"The announcement today appears to signal greater openness to easing from senior policymakers, but more fiscal easing measures are needed to boost domestic demand in our view," said a team of Goldman Sachs economists led by Xinquan Chen.

Capital Economics' Evans-Pritchard warned that with households deleveraging and many private firms cautious about borrowing, monetary policy has lost much of its effectiveness in China.

"As such, today's moves are unlikely, on their own, to drive a turnaround in credit growth and economic activity. Achieving that would require more substantial fiscal support than the modest pick-up in government spending that's currently in the pipeline," Evans-Pritchard added.

And Richard Hunter, head of markets at Interactive Investor, said it was a promising sign that the authorities in Beijing had accepted a need to act but "of itself, the news is unlikely entirely to erase the investor apathy which has plagued the country over recent months."

-Jamie Chisholm

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09-24-24 0852ET

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