How will the impact manifest itself in the markets? Via Investing.com

China on Tuesday unveiled a comprehensive set of stimulus measures aimed at reviving its faltering economy, stabilizing the housing market and restoring investor confidence.

In a press conference, Chinese regulators outlined a series of aggressive actions. Key among these are across-the-board rate cuts, including the reserve requirement ratio (RRR), mortgage rates and down payment rates.

In addition to these cuts, targeted initiatives have been introduced to boost stock market investment and encourage long-term capital inflows.

One of the most important measures is the establishment of a RMB 500 billion swap facility. It is designed to enable non-banking financial institutions (NBFIs) such as brokers, insurers and funds to increase their leverage and equity investments.

“NBFIs can use the funds from the swap only to invest in equities. Depending on the size of the investment, NBFIs will be more exposed to the market and P&L/balance sheet volatility will increase,” Bank of America analysts explained.

Another initiative involves RMB 300 billion in targeted reloans from the People’s Bank of China (PBOC) to support banks in lending to listed companies and shareholders. These funds, with an interest rate of 2.25%, are intended to assist in share buybacks and share purchases.

According to BofA, the move “should be positive for the market and brokers to avoid forced liquidation” in the short term, however, it will “tie banks closer to the stock market.”

In addition, the PBOC encourages broader participation in the stock market through long-term vehicles such as stock index ETFs, insurance funds and corporate annuities. As part of this, insurers are being asked to set up private funds, similar to a pilot fund set up by China Life and NCI. In addition, mutual fund fees may face reductions, further supporting market liquidity.

Mergers and acquisitions (M&A) are also expected to benefit as the government plans to streamline the process, reduce valuation caps and introduce new guidelines. BofA notes that these changes could lead to a “significant increase” in M&A activity over the next 6-12 months, boosting brokers with strong investment banking businesses.

Analysts at BofA believe these measures will provide immediate liquidity, particularly to the benefit of China’s A-share market.

“We expect the market to receive fresh liquidity from both banks and NBFIs and potentially, if the market works long enough, the return of retail and overseas investors may further help stabilize the market ”, the analysts said.