MNI: Reforms Needed To Consolidate China’s Stock Rally

MNI (BEIJING) - Beijing must continue to pursue equity market reform and provide fiscal stimulus to consolidate recent A-share gains driven by the central bank’s monetary easing, and the planned introduction of new capital market financing tools, advisors and analysts told MNI. 

The sustainability of the equity market’s rally this week depended on improved economic conditions and increasing the quality of listed companies, said Zhao Xijun, co-president of China Capital Market Research Institute.

The CSI 300 rallied over 4% on Tuesday – its best day in four years – after the People’s Bank of China revealed a range of measures, including an initial CNY800 billion in capital market financing support, Zhao noted. 

However, investors’ willingness to use central bank financing to buy and hold stocks hinged on reasonable dividends and investment returns, which needed further institutional reforms, Zhao cautioned, pointing to moves by the securities regulator to encourage a range of activities – such as mergers and acquisitions, equity incentives, and cash dividends – to increase listed company value, alongside plans for a more efficient restructuring market. 

The Politburo meeting Thursday also provided a strong signal for additional fiscal measures and propelled the CSI 300 to an accumulated 13.5% gain for the week at the time of publication. The index has fallen about 40% since its early 2021 peak.

FISCAL EFFORTS

Stronger fiscal measures were also needed to address weak expectations amid persistently sluggish domestic demand, Zhao continued.

“Government spending is a better stimulus and could be needed to address stagnant liquidity after the monetary easing,” Zhao said, pointing to the PBOC’s 20-basis-point cut to its 7-day reverse repo rate to 1.5% and the 50bp reduction to the reserve requirement ratio. Direct consumer subsidies would boost the low consumer sentiment that had driven high savings rates, he added. (See MNI: More RRR Cuts Would Pave Way For China Bond Sales-Advisors )

Beijing should use treasury proceeds to enhance unemployment and maternity benefits substantially to boost consumer confidence, rather than delay action that would incur more debt over the long term, Zhao argued. (See MNI: Beijing Shifts Focus To Consumption To Boost H2 GDP)

Dong Zhongyun, chief economist at AVIC Securities, expects the government to announce fresh fiscal measures soon which will likely match the intensity of the PBOC’s greater-than-expected monetary easing. 

Anticipation for authorities to increase the deficit has risen, given the need for additional treasury issuance, Dong said, noting the October meeting of the Standing Committee of the National People's Congress could validate such a measure.

Dong raised his annual GDP growth forecast to 5%, after clear policy intentions to stabilise growth were announced this week.

LONG-TERM FUNDS

Liquidity and risk appetite had improved following the PBOC’s pledges for further financing support and other recent measures to promote medium and long-term funds into the market, Dong added.

China’s National Financial Regulatory Administration intends to increase long-term investment by allowing more insurance companies to establish hedge funds, while the China Securities Regulatory Commission will reform supervision and assessments to better suit long-term equity investors.

Property and life insurance companies can still invest CNY1.3 trillion into equity before reaching the regulatory ceiling, Dong noted.