Why China’s Stocks Are Surging: How Long Will It Last? – Ep. 2
(Feat. Xi Jinping, Interest Rate Cuts, Market Rally, Exit Strategy, Shanghai Beijing Stock Exchange, PMI, Risk hedge and Portfolio)
Continued from Part 1 (Numbers 1-75). Now, let’s wrap things up with points 75 to 124.
75. China has started taking action.
76. On July 22, China made a surprise move by cutting its benchmark interest rate.
77. The market expected the rate to stay the same, but China lowered it instead.
78. Despite the rate cut, the market’s reaction was “underwhelming.”
79. China’s National Bureau of Statistics reported that the manufacturing PMI (Purchasing Managers’ Index) for September rose to 49.8, up from August’s 49.1.
80. A PMI of 49.8 met both last month’s figure and market expectations, but for the economy to be considered in an expansion phase, PMI needs to be above 50.
81. PMI is an important economic indicator based on surveys of corporate purchasing managers, conducted by China’s National Bureau of Statistics.
82. A PMI above 50 shows economic growth, while a reading below 50 signals a slowdown.
83. The details of the manufacturing PMI showed that new orders, overseas sales, and demand had been falling for five months straight, and employment stayed weak.
84. The rise in PMI was mainly due to improved business sentiment among purchasing managers.
85. Even though the outlook is gloomy, the government’s strong stimulus efforts have made managers feel more optimistic.
86. Meanwhile, the private Caixin Manufacturing PMI dropped sharply from 50.4 in August to 49.3 in September, its lowest in two years.
87. Analysts pointed out a growing gap between capital markets, like stocks, and the real manufacturing sector. With weak economic fundamentals, some predict that money might increasingly flow into financial markets instead.
88. China’s growth target for 2024 is 5.0% or higher.
89. In the first quarter of 2024, growth was 5.3%, but it dropped to 4.7% in the second quarter. The third-quarter growth rate will be released around October 18.
90. While not publicly shared yet, it’s likely that China’s top officials already know the third-quarter numbers.
91. To hit the 5% annual target, the average growth in the third and fourth quarters needs to be above 5%.
92. It’s likely that the third-quarter growth will be somewhere in the 4% range.
93. On September 26, President Xi Jinping chaired a meeting of China’s Central Politburo.
94. According to state-run Xinhua News Agency, the meeting was held to ‘analyze and study’ the current economic situation.’
95. It’s unusual for the Politburo to discuss the economy in September.
96. Normally, the Politburo talks about economic issues in April, July, and December. The fact that they discussed it in September shows they’re deeply concerned.
97. At the meeting, they probably reviewed the third-quarter growth rate and the expected yearly growth. It seems likely there were some serious concerns raised.
98. Just before the Politburo meeting, the People’s Bank of China (PBOC) had already announced measures to cut mortgage rates and inject funds to stabilize the stock market.
99. However, the Politburo, led by Xi Jinping, likely decided these steps weren’t enough.
100. After the meeting, the Politburo announced that “new challenges and problems” had emerged in the economy. They called for stronger fiscal and monetary policies, including lowering the reserve requirement ratio (RRR), cutting interest rates more aggressively, reversing housing restrictions, and protecting small investors.
101. The message was clear: they need to pump more money into the economy, revive the housing market, and boost the stock market to meet their goals.
102. The day after the Politburo meeting, on September 27, the PBOC lowered the reserve requirement ratio for banks from 7.1% to 6.6%, a 0.5 percentage point cut.
103. Given that the announcement came the next morning, the PBOC staff probably had a hectic day putting it into effect.
104. This means that for every 100 deposited, banks can now lend out 93.4, compared to 92.9 before.
105. The 0.5% cut in the reserve requirement ratio adds 1 trillion yuan ($137 billion) of liquidity into the market.
106. Over the past three years, the PBOC has cut the reserve requirement ratio six times, bringing it down from 8.6% to 6.6%, releasing a lot of money into the economy.
107. The PBOC governor announced that this won’t be the last cut.
108. He hinted that, depending on conditions, they might cut the reserve requirement ratio again by the end of the year, potentially injecting another 1 trillion yuan.
109. On September 29, another major announcement followed.
110. The PBOC said it would guide commercial banks to cut interest rates on existing real estate loans by the end of October.
111. China usually has fixed interest rates on loans, but now they’re ordering banks to lower rates by at least 0.5% on loans that have already been issued.
112. They also relaxed loan-to-value (LTV) ratios, allowing borrowers to get loans for up to 85% of their home’s value.
113. The message is clear again: “We’re lowering interest rates so people spend more, and raising loan limits so more people can borrow to buy homes.”
114. One reason for these fast-tracked measures was the hope of boosting consumer spending during the National Day holiday (October 1-7), a peak travel season.
115. On October 6, as the holiday was wrapping up, the South China Morning Post (SCMP) published an article analyzing the holiday’s impact.
116. The article noted that while more tourists were traveling, they were hesitant to spend, which reduced the overall economic boost.
117. On the last day of the holiday, October 7, China’s State Council announced it would hold a major press conference on October 8.
118. On October 8, the government revealed plans to inject an additional 200 billion yuan ($27 billion) into the economy by year-end.
119. The central government also said it would bring forward 100 billion yuan ($14 billion) from next year’s budget and release a list of 1 trillion yuan ($137 billion) worth of infrastructure projects by the end of the month.
120. However, despite the press conference being held on a holiday, the announcement of an additional 200 billion yuan in stimulus was seen as disappointing.
121. The market had been expecting a much larger package, perhaps around 10 trillion yuan ($1.4 trillion) through special bond issuance.
122. That’s why the CSI300 Index, which tracks China’s top 300 companies, initially surged 11% but ended the day with a 5% gain once the details were made public.
123. In a system with centralized power, strong actions by the leader can have a big impact in the short term.
124. However, despite potential long-term risks, it looks like China will keep pushing these measures until the end of the year, when the 2024 growth target is officially confirmed.
Alphazen Insight
If you’re holding onto Chinese stocks, it might be smart to plan your exit during the post-NPC(National People’s Congress) market boost. I still think that’s the way to go. But with more stimulus expected to chase that 5% growth target by year-end, keep an eye out and time your move carefully. You’ll want to exit on a high note!
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