PBOC Provides a Positive Surprise

In a surprise announcement, the People’s Bank of China (PBOC) announced it will inject liquidity into capital markets in a set of easing measures designed to support both the housing and stock markets. The actions came amid ongoing weakness in housing prices and slowing consumer spending, which has weighed on growth and raised the specter of deflation. Falling US rates have driven a weaker US dollar and may have given the PBOC some additional room to maneuver. Chinese equity markets have ralled on the news, which has been broadly viewed as positive for Chinese equity market outlook.

Below are some of the liquidity-oriented initiatives China has undertaken.

Stock Market

• 500 billion yuan swap facilities to conduct stock purchases
• 300 billion yuan lending facility for share buybacks at 1.75%

These measures, designed to bolster the equity market, appear to constitute a new approach on the part of Chinese authorities. They will allow qualified insurance companies, securities firms and investment managers access to central bank liquidity, which should be supportive for equity prices.

Housing Market

• Down payment ratio on second homes lowered by 10% to 15%
• 50 basis point cut of existing mortgage rates
• Social housing relending tool: Increasing loans up to 100% of property value (from 60%) at 1.75% for social housing buy-back programs

This broader support will likely help in the near term; however, there remains the issue of oversupply in housing.

Other Liquidity Measures

• 50 basis point cut in the reserve requirement ratio: lowers the amount banks hold in reserve, increasing the amount available to lend
• Provided guidance for a further 25 to 50 basis points’ worth of cuts over the rest of the year
• 20 basis point cut in the 7-day reverse repo rate, the rate at which banks borrow from the central bank

These measures lower financing costs while seeking to maintain bank profitability. However, access to capital has been less of an issue than subpar demand for credit, which the PBOC are trying to stimulate through lower rates. Local governments have been slow to implement repurchase programs to date, so further fiscal encouragement may be needed to support the property market.

Overall, the PBOC surprised the market through policies that were more accommodative than anticipated and should help improve sentiment. It will take a little time to see how effective these measures are, but we are encouraged that the Chinese government is focusing on growth and its implications. By announcing an unusually large number of policies together, authorities are sending a clear message to investors that they grasp the severity of the problem.

Subsequent announcements on September 26th following a surprise politburo meeting have added to the positive sentiment. The statement pledged additional fiscal measures and counter cyclical policies with a goal of arresting falling house prices, boosting the equity market and improving employment. While we don’t know the details, these announcements together signal an increasing urgency to deal with China’s housing problems and broader economic slowdown.

While this signals the government's resolve to address the issues, both the timing and extent of these additional measures will be critical in reversing the structural issues facing the Chinese economy. We believe strong measures on the fiscal front are needed to drive the economy forward.