– September 24: PBOC, CSRC, and Financial Regulatory Administration introduced the “Three Arrows” of monetary policy.
– September 26: Central Political Bureau meeting aimed to boost capital markets and stabilize the real estate sector.
– October 8: NDRC announced a 4 trillion RMB investment plan for pipeline infrastructure.
– October 12: Ministry of Finance outlined fiscal measures, with market expectations of 2 trillion RMB in special refinancing bonds, 1 trillion RMB in special treasury bonds to recapitalize banks, and 1.3 trillion RMB to purchase unsold housing stock.
– October 17: Ministry of Housing and Urban-Rural Development announced plans for 1 million units under the monetary shantytown renovation program and 1.8 trillion RMB in new real estate loans for approved developers.
Since September, China’s capital markets have continued to decline, touching 2700 points as macroeconomic data failed to meet expectations. As of now, all September macro data have been released: exports fell more than expected, consumption surged beyond forecasts, and investment remained stable. Third-quarter GDP grew by 4.6%, while year-to-date GDP growth reached 4.8%. To achieve the full-year growth target of 5%, the fourth quarter would need to reach 5.4%. This indicates significant pressure on the economy to stabilize growth. Against this backdrop, the September 26 Politburo meeting introduced several new macroeconomic policies, causing notable market fluctuations. As previously mentioned, we advised selling into market rallies, and since the holiday, the Shanghai Composite Index has been oscillating near 3700 points with intense sector rotation, driven by speculative trading. Gains one day are often followed by losses the next. The effectiveness of macroeconomic policies will only become apparent over the next one to two months.
This round of policy adjustments represents a significant departure from previous frameworks, with a clear focus on supporting both the capital and real estate markets. The push to boost the capital market is driven by two factors: First, capital flows have shifted toward the bond market, creating considerable financial risks. Second, boosting asset prices offers an immediate wealth effect, which is more effective at stimulating consumer expectations than issuing consumption vouchers. The PBOC has introduced two instruments—one totaling 500 billion RMB and the other 300 billion RMB. Given that most Chinese enterprises are state-owned, we have little doubt that these tools will be implemented. However, from the PBOC’s balance sheet perspective, these measures won’t expand the balance sheet or inject new liquidity, leading to increased volatility as existing funds rotate within the market. While authorities have pledged to encourage long-term capital inflows, we believe such inflows will be gradual, and their impact on the market will not be immediately visible.
Turning to the real estate market, we have long argued that selling unsold housing stock is the key to restoring normalcy. After a year of regulatory efforts, the government has finally committed to buying unsold homes. This move is highly beneficial for the real estate market from a supply-demand perspective. On the one hand, special bonds will be used to purchase unsold properties, easing pressure from overstocked inventories. On the other hand, the 1 million units under the shantytown renovation program will increase demand while reducing inventory. However, the core challenges lie in funding and timing. If a third of the 3.9 trillion RMB in special bonds for 2024 is allocated to purchase housing stock, this equates to 1.3 trillion RMB. Assuming each unit costs 2 million RMB, this would total 2 trillion RMB, bringing the total package to 3.5 trillion RMB. This is a significant sum, but the burden of repayment will fall on local governments. While we don’t doubt the political commitment of local governments, it is unrealistic to expect such a large cash flow in a short period. This policy will likely take a year or more to be fully implemented. Commercial banks may be willing to lend for political reasons, but local governments’ repayment capacity remains uncertain. Where will the funds come from? The delays in cash flow are bottlenecks for policy implementation. The sharp decline in real estate stocks following the Ministry of Housing meeting reflects the market’s pricing of these risks.
Looking ahead, market participants are closely watching the National People’s Congress (NPC) meeting in late October and early November, where discussions will center on how much the central government deficit will increase. It is clear that without adequate funding, these policies cannot be fully executed. This calls for cautious optimism in the capital markets, with the strategy being to sell into rallies.
In conclusion, the current macroeconomic policies are relatively aggressive, but the key issue remains: where will the incremental funding come from? Whether through the PBOC’s new tools, local government special refinancing bonds, or the shantytown renovation program, the debt burden will fall on local governments and state-owned enterprises. Borrowing is feasible as long as there is sufficient cash flow to service the debt—but where will this cash flow originate?