The announcement of a stimulus “bazooka” by the government of the People’s Republic of China (“PRC”) has generated fevered activity in the stock markets, and buoyed hitherto subdued hopes of improvement in mainland China’s economic outlook.

Whether these measures will prove sustainable, though, is not yet clear, given the vast scale of the challenge, the deep weakness of the real estate sector, and a severe loss of business confidence in recent years.

Actions by the National People’s Congress (“NPC”), China’s legislature, in the coming weeks should provide some clear indication of policy priorities, but foreign investors should be mindful that the outlook remains unpredictable, and that exposure to threats varies greatly, in terms of geography, sector, and sensitivity to policy.

Going forward, boards should make decisions on a case-by-case basis – and not in response to market euphoria. SVA can help identify opportunities, assess the risks at play, and monitor for major changes, so as to advance and protect company interests.

The “bazooka”

On 24 September 2024, the governor of the People’s Bank of China (“PBOC”), Pan Gongsheng (潘功勝), the Minister of the National Financial Regulatory Administration (“NFRA”), Li Yunze (李雲澤), and Chairman of the China Securities Regulatory Commission (“CSRC”), Wu Qing (吳清), together announced a stimulus aimed at reinvigorating China’s slackening economy, and at alleviating fears of deflation.

The measures included: reductions to the bank Reserve Requirement Ratio (“RRR”) by half a percentage point; cuts to the seven-day reverse repurchase agreement (“repo”) rate from 1.7% to 1.5%; a structural monetary policy facility of CNY500 billion for security houses, fund managers and insurers, to purchase stocks via a swap line pledging assets for higher-quality assets; and a 1.75% relending facility of CNY300 billion, to encourage banks to support listed companies’ share buy-backs.

The authorities also sought to boost the real estate sector: by cutting the mortgage rate by 0.5%; by supporting bank lending for purchases of developers’ land; by trimming down payment ratios; and by encouraging local governments to buy up unsold homes. The government also extended a “16 point plan” aimed at bolstering commercial property loans until December 2026.

These measures quickly resulted in a sharp rise in China’s hitherto depressed stock markets. The Hang Seng Index in Hong Kong leapt 6.2% on 2 October 2024, for instance, to its highest level since January 2023, before subsiding a touch. Markets in Shanghai and Shenzhen also shot up prior to the National Golden Week holiday.

A shift in policy?

Of particular note was that Chinese Communist Party (“CCP”) General Secretary Xi Jinping shortly afterwards called on his officials to halt the decline in real estate values, and to spur a stable recovery. His comments suggested that the core leadership wanted to shore up economic and social stability.

Even so, doubts as to the sustainability of these measures remain. Certainly, Beijing wants to boost growth, conscious of its 5% GDP target for 2024, but a stock market frenzy and consumer boom ignited by cheap money clearly conflict with the government’s longstanding emphasis on “common prosperity”.

Restoring confidence may thus prove challenging, not least because of a seeming contest under way between “securocrats” and “economists” within the CCP, which has resulted in policy “flip flopping”. The associated uncertainty has seriously damaged investor confidence.

In this context, the optics of the announcement only added to questions. Wu Qing (吳清), the CSRC head who announced the measures, has hitherto championed crackdowns on errant financiers. He makes an unlikely champion of government largesse.

What comes next?

Ultimately, the impact of the stimulus will depend on how far the Chinese government chooses to go, and for how long.

One important indicator of future direction, then, will come from the National People’s Congress (“NPC”) and its Standing Committee, which must endorse and implement supportive actions in the coming weeks.

The NPC’s Council of Chairpersons will probably meet in mid-October 2024 to set the immediate agenda, before the NPC Standing Committee passes laws later in the month. When these meetings take place, investors will have a much clearer sense of whether the government’s “heart” is truly in a policy shift.

A separate technical point is whether the measures are large enough. After all, the scale of the slowdown is vast; some people argue that the “property overhang” may take as long as three years to clear. Dragging China out of its malaise and restoring confidence, then, will surely take more than these measures.

A further issue is that prior actions taken against the trust sector, and other financial intermediaries have caused serious damage to the “pipework” of the financial system. As such, it is not certain that the money will get to where it needs to be.

Securities houses

A separate question relates to what is actually going on. On the face of it, the measures amount to a stimulus, but some elements suggest a bailout – such as the swap lines for securities houses aimed at improving their asset holdings.

The timing of that measure is also striking, in that in early September 2024, two major securities firms, Guotai Junan Securities Company, Limited (国泰君安证券股份有限公司) and Haitong Securities Company, Limited (海通證券股份有限公司), announced a merger.

The merger was noteworthy as Haitong Securities in January 2024 had reported serious losses, had removed the head of its Hong Kong business, and saw a senior executive flee oversees, before arrest and repatriation in August 2024. The combination thus recalled the “shotgun wedding” between UBS and a collapsing Credit Suisse.

A rising stock market should benefit these securities firms, but could also allow for a behind-the-veil offloading of bad assets. China has form, here. Such an approach would recall the recapitalisations of banks carried out by former Premier Zhu Rongji in the late 1990s and early 2000s.

Opportunities and risks

The Chinese government’s stimulus measures, then, have provoked a steep rise in stock markets, and may herald an improvement in economic prospects, so presenting new opportunities to investors.

However, whether the shift will prove sustainable is unclear. One problem is the scale of the challenge; at the least, more will need to be done. Another problem is the “tug of war” between policymakers advocating growth and those championing public security and stability.

The actions of the NPC in the coming weeks should provide clarity on policy, but whether these measures will be enough to rebuild confidence is still in doubt, particularly if the stimulus is used to disguise bailouts.

In short, investors need to be mindful that these shifts will affect companies and investments differently, according to sector, geography, and sensitivity to policy. Boards thus need to make decisions on a case-by-case basis – and not in response to market euphoria.

SVA can help assess the risks at play, and can monitor developments to provide early warnings to which to respond; and in doing so, SVA can help companies identify opportunities, and protect company interests.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

SVA has three core lines of business, which are: Business Intelligence and Political Risk; Corporate Investigations; and Special Risk.

SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.

SVA is based in Hong Kong, Singapore, and London and operates globally.