MNI INTERVIEW: PBOC Moves, Stimulus To Boost Stocks-BOC's Zong

MNI (BEIJING) - A swap facility and a relending tool for stock buy-backs will boost liquidity in Chinese stock markets which are also likely to be buoyed by further policy stimulus this year together with official encouragement of mergers and acquisitions and a likely relaxation of limits on share allocations for institutional investors, a senior policy advisor told MNI.

The CNY500 billion Securities, Funds and Insurance companies Swap Facility announced by the People’s Bank of China last month resembles the U.S. Term Securities Lending Facility deployed during the 2007-2008 financial crisis, though it will only target equities, said Zong Liang, chief researcher at the Bank of China's Research Institute.

The PBOC has signalled it could increase its size if needed, he noted in an interview, adding that the central bank is also likely to expand the range of collateral eligible for the facility. Currently it accepts bonds, stock ETFs, and CSI 300 shares, which institutional investors can exchange for high-grade liquid assets such as government bonds and central bank bills.

The PBOC has also announced a CNY300 billion relending tool for stock buy-backs, in a further sign of the emphasis policymakers are placing on targeted tools, which are more flexible and less balance-sheet intensive, Zong said.

Large companies with price-to-book ratios below one will benefit most from the refinancing tool, which will allow them to buy back stock, he added.

Authorities will also encourage merger activity to enhance the quality of listed companies, and are likely to boost allocation sizes of shares for institutional investors, attracting more medium- and long-term funds into the market, alongside investor protection enhancements, according to Zong. (See MNI: Reforms Needed To Consolidate China’s Stock Rally)

STIMULUS MEASURES

The new PBOC facilities, together with other stimulus, have driven the CSI 300 up to as much as 4450 so far in October, from its high of 4038.7 in September.

Officials will aim to ensure GDP growth of at least 5% this year and average annual growth of above 4.5% between 2026 and 2030 in a bid to double output by 2035 compared to 2020, Zong noted, predicting Q3 GDP due Oct 18 should print at 4.8% y/y, and growth should pick up to 5.1% in Q4 thanks to the additional stimulus.

China’s central government has significant room to increase borrowing, and the Standing Committee of the National People's Congress is likely to announce later this month an increase in its deficit ceiling and bail out local governments, which have run up large quantities of off-balance-sheet debt, from their implicit borrowings, Zong said. 

The Ministry of Finance told reporters Saturday it would increase debt issuance to support local governments as well as the housing sector. 

As China reaches a critical point in attempting to overcome the middle-income trap and become a high-income country, while contending with a significantly changed external environment, the emphasis of macroeconomic policy has started to shift from investment to consumption, Zong noted, pointing to the struggling real-estate market as another top focus. Retail sales growth is set to fall to an annual 3.2-3.6% in 2024, compared with 7.2% in 2023 and over 8% in 2019, he said. 

Authorities will also aim to increase employment, particularly among graduates and migrant workers – and work towards medicine, education, pensions and healthcare reform to encourage people to spend their savings, he continued. China has a high savings rate, an enormous domestic market and significant potential for consumption growth, he added. (See MNI INTERVIEW: Yuan Rally To Depend On Stimulus, Fed- Guan Tao)