China’s policy bazooka

The Chinese financial regulators recently announced a series of monetary measures with an aim of supporting the economy. In this podcast, we discuss how effective the policies are, whether this is just another bounce or if it marks the beginning of a sustainable rally, and what this means for investors.

This podcast is presented by Richard Tang, China strategist and Head of Research Hong Kong for Julius Baer.

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“Beyond Markets” by Julius Baer is a series featuring conversations with experts to share recent market developments, key insights, and strategic inputs from around the globe. In each episode, we cut through the noise to offer practical advice and macro research on today’s shifting economic and market landscape.
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On the 24th of September,

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on Tuesday

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the Chinese

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financial regulators announced

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a series of monetary measures

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to ease financial conditions

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further in the country.

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There are three categories of policies.

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First, on the monetary side,

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the central bank cuts reverse

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repo rates by 20 basis points,

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cuts reserve requirement ratio by 50

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basis points.

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And plans to raise

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core tier 1 capital of six large commercial banks

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Or simply put, replenished capital

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for these large banks.

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On the property front,

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it lowered the downpayment ratio

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for second homes

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and cut the existing mortgage

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rate by 50 basis points.

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And finally,

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the People's Bank of China

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also announced policies

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to boost stock

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market sentiment,

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including a swap facility of ¥500 million

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by the non-bank financial institutions

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to buy Chinese stocks,

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another ¥300 billion

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for corporates to buy back shares

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and also potentially

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a stock stabilisation fund.

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This set of monetary

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measures is clearly

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well thought out and very,

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very well planned.

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The central bank

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knows what the market wants

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and delivered the market wants.

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Can the monetary measures

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announced on Tuesday

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boost market sentiment

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and valuation? Yes.

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But can they help the economy

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and therefore corporate earnings?

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Probably very little.

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We have long argued that

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the monetary condition is not a binding

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constraint on the economy

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and is a fiscal policy that matters.

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So before we see any forceful

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and effective policies

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being rolled out,

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we see this

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as another tactical bounce

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in the market,

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but likely larger than the previous ones

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that we saw in the past.

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And it will be valuation driven

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without much positive

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earnings revisions to expect.