Will China’s $100 billion equity war chest lift the real economy?

Chinese markets briefly welcomed an “unprecedented” set of tools promised by Beijing to stabilize capital markets and revive animal spirits, but the bigger concern is whether the measures will be enough to boost the faltering real economy.

The People’s Bank of China on Tuesday unveiled an 800 billion renminbi ($114 billion) war chest to boost the stock market by lending to asset managers, insurers and brokers to buy shares and listed companies to buy back the actions.

This was the first time the PBoC had “innovated” and used these types of monetary policy tools to support capital markets, central bank governor Pan Gongsheng said in a briefing accompanied by financial regulators.

Funds allocated could be doubled or tripled if the schemes work. Policymakers also floated an idea for a “stock stabilization fund,” though few details were given.

The measures amount to one of the biggest bazookas the PBoC has aimed at China’s stock markets, which have tumbled over the past four years, reflecting a lack of confidence in the country’s struggling economy.

Following the announcement, China’s CSI 300 index of shares listed in Shanghai and Shenzhen – which has fallen more than 40% since 2021 – rose 4.3% for its best day since July 2020.

On Wednesday, it rose 2.1 percent in a general rally, while the renminbi strengthened 0.5 percent against the dollar to just above 7.01, its highest level in more than a year.

Borrowing programs to support stocks were among a raft of stimulus measures by the PBoC, including cuts in the benchmark interest rate, mortgage rates and down payment requirements. They follow the US Federal Reserve’s mild 50 basis point cut last week, which gave the central bank room to maneuver.

“These measures exceeded market expectations,” said Ding Shuang, chief economist for China and North Asia at Standard Chartered. “It probably marks the beginning of more aggressive policy measures compared to in the past when people complained about incremental policy responses.”

However, “we still need to look at the size and usage of (the programs) to assess their impact on the market,” Ding said.

Jason Lui, Head of Asia-Pacific Equity and Derivatives Strategy at BNP Paribas, said: “There have been some new ideas, particularly when it comes to the credit and swap facility.”

The new swap tool allows non-bank financial companies to borrow from the PBoC to buy shares, offering bonds, stocks or exchange-traded funds as collateral. The lending program provides cheap loans to commercial banks, which can then lend them to companies that want to finance share buybacks as a way to increase the value of their equity capital.

Economists suggested the share-buying incentives were aimed at expanding share ownership by the so-called national team of state-backed financial institutions, which earlier this year bought billions of dollars worth of mainland-listed stocks in a bid to to stimulate the market.

Wu Qing, chairman of markets watchdog the China Securities Regulatory Commission, told a briefing on Tuesday that by the end of August, institutional investors had increased their free float in mainland-listed A shares from 17% to 22.2% cent, compared to 2019.

But he said there was still “not enough” medium- and long-term funds in the market, where rapid movements in retail money often hurt stock market sentiment.

“The spirit of this program is aimed at other financial institutions that are currently hesitant to increase their equity allocations,” said BNP’s Lui.

“It depends on whether the funds will be willing to borrow from the PBoC to buy stocks, but they will be liable for losses if they fall,” Ding added.

Beijing sees the stock market as a clear signal of a healthy economy and an important tool for managing social stability.

Analysts at Morgan Stanley said the stimulus was equivalent to 3 percent of the entire free float of China’s A-share market, calling the measures “an absolutely positive move.” However, they cautioned that the new tools will not be a sufficient condition for China’s overall recovery.

“The long-term sustainability of the improvement in market sentiment and the recovery are more dependent on macroeconomic recovery as well as growth in corporate profits that are bottoming out,” they said.

Economists noted that Tuesday’s stimulus measures were significant, particularly the simultaneous cuts in the benchmark interest rate and the reserve requirement ratio, the amount of reserves lenders must hold. Pan said the 0.5 percentage point reduction in the ratio alone would add 1,000 lei in liquidity.

China continued those cuts by announcing a 0.3 percentage point cut in its one-year medium-term lending facility on Wednesday, affecting banking sector liquidity.

But most analysts said only a big fiscal stimulus that stabilized a prolonged property decline in China and directly benefited households would help rekindle confidence and stem deflation.

The PBoC announced measures that would effectively cut interest rates on a 300 billion lei scheme to buy unsold homes, but the program has struggled to get off the ground.

Robert Gilhooly, senior emerging markets economist at Abrdn, said Tuesday’s rate cut for existing mortgage holders was “the closest thing we’ve had to a household tax transfer”.

But ultimately the government will need to step in with more state funding to save the housing sector, otherwise household spending is likely to remain “constrained by the negative wealth effect from falling house prices and a weak labor market” , he said.