Chinese equities rise on new stimulus package

Podcast: CIO's Jason Draho on the latest UBS House View (21:11)

Chinese equities climbed on Tuesday after the People’s Bank of China (PBoC) and other Chinese regulators announced a series of stimulus measures aimed at reviving the world’s second-largest economy. The offshore Hang Seng Index and the onshore CSI 300 Index rallied 4% and 4.3%, respectively, their best single-day gains in more than two years. The yuan added to its recent strength against the dollar, with USDCNY testing a new 16-month low near 7.037.

Following a run of tepid activity data, economists and investors alike had been anticipating new stimulus measures. The central bank’s announcement was slightly more aggressive than expected, though we think more fiscal intervention is needed. Below we detail the new measures and their likely investment implications:

Monetary policy has become more accommodative. The PBoC said it would cut the 7-day reverse repo by 20 basis points (bps) to 1.5%, and that deposit rates would come down to cushion the impact on banks’ net interest margins. Banks’ reserve requirement ratio (RRR), which determines the amount of cash they must hold in reserve, will also be reduced by 50 basis points. We estimate the RRR cut should add around CNY 1tr in long-term liquidity into the system. The PBoC suggested there could be scope for another cut of between 25bps and 50bps later this year, if liquidity and macro conditions warrant it.

Support for the property market focused on existing homes. With the property market downturn persisting, several new measures were rolled out targeting housing in particular. Existing home mortgage rates will be cut by 50bps, narrowing the gap against new mortgages while also reducing the interest burden on existing owners. The minimum down payment ratio for second-home buyers was reduced to 15% from 25%, in line with the rate on new home purchases. Property inventory buybacks were also supported, with loan-to-value ratios on re-lending lifted to 100% from 60%.

Equity markets get some support from new monetary tools, too. As part of the stimulus, a new swap facility was announced that will allow brokers, funds, and insurers to tap the PBoC directly to borrow against qualified collateral in order to buy stocks. A relending program will also be established to encourage share buybacks.

This latest announcement represents a welcome shift to a more accommodative stance, but it still falls short of the kind of major stimulus packages of past years that spurred lasting rallies. To break the ongoing deflation-deleveraging loop, we think monetary easing alone is insufficient and that additional fiscal support must play a bigger role. More fiscal stimulus could come in October in the form of a budget revision, in our view, especially if third-quarter GDP remains well below the 5% level.

Within Chinese equities, we anticipate near-term support on the stimulus news, contingent on evidence of effective execution. We expect rate cuts and capital market support to benefit state-owned enterprises (SOEs) concentrated in high-dividend sectors, including utilities, telecoms, energy firms, and financials. We remain cautious on property developers, but the leading property agencies could benefit from the easing policies. Within currencies, we continue to recommend hedging CNY exposure heading into the US election. We remain Most Preferred on the Australian dollar, which we believe should find support from China’s pro-growth measures.