China and strong moves to stabilize the market

The 'Asian Dragon' bogged down in the most severe deflation in 15 years and this world's largest Real Estate (RE) market unable to recover has caused pervasive pessimistic sentiment across China's financial markets.

Since the beginning of the 2024 calendar year, Chinese stocks have continuously declined despite the global stock rally.

However, the Chinese stock market saw a slight recovery last week right before the Lunar New Year. This stemmed from a series of fiscal and monetary stimulus policies from the Chinese government, and of course, including trading restrictions on the stock market.

One day before the market closed for the holiday, China appointed Wu Qing - a figure nicknamed "Broker Butcher" as Chairman of the China Securities Regulatory Commission. This action promises more heavy-handed measures impacting the market after the holiday.

At the start of the 2024 Year of the Dragon, Viet Hustler's weekend Macro Economics column returns to China with the article Summarizing fiscal-monetary stimulus policies and measures impacting the stock market of China recently. This could be crucial information determining whether the Chinese stock market and economy will recover after the holiday.

Disclaimer: Some of the information below is excerpted and compiled from Bloomberg.

Video: China - Why has the economic model reached a dead end?

Overview of the recent economic situation in China

The most serious issue facing China's economy currently is DEFLATION:

Consumer prices are falling at the sharpest rate since 2009, even though the final lunar year months should be peak shopping periods for consumers,

CPI down -0.8% y/y, PPI down -2.5% y/y.
FYI: Apple's sales in China also fell -13% in Q4 due to broad demand weakness in the billion-person market.
China's Manufacturing PMI continued to decline in January below the 50 threshold (contraction threshold).
- Non-manufacturing PMI also declined severely.

Deflation and stagnation in the RE sector have dragged China's economy into the second major problem since early 2024: pessimistic sentiment in the stock market leading to the largest sell-off in history.

The early 2024 sell-off on Chinese stock exchanges wiped out ~USD 7 trillion in market value (vs. peak at end of 2020).
- far exceeding the USD 6.8 trillion sell-off in mid-2015.
Chinese stocks have been left far behind the upward trend of global stocks.
The most severe declines came from small-cap stocks:
The CNY also has diminishing influence on other Asian regional currencies (correlation declining - green chart below).

The RE market remains stagnant with no signs of improvement:

Home purchase lending and RE project development investment activities are continuously declining:

Chinese people are shifting to gold and rare metals investments to store wealth instead of RE:

Amid the severe declines in the stock market + RE, the Chinese government has decisively rolled out strong remedial measures, improving investor sentiment over the past 2 weeks.

Timeline of fiscal-monetary policies and market interventions from the Chinese government

1 - Strong measures from the government to stabilize the stock market

02/07: One day before the market closed for the holiday, Beijing appointed Wu Qing as head of the China Securities Regulatory Commission (Xinhua).

Wu Qing holds a PhD in economics, was former Chairman of the Shanghai Stock Exchange, and is known for the nickname "Broker Butcher" (Broker Butcher) due to heavy-handed market measures including:
- 2000: Wu Qing shut down 31 securities firms (~1/4 of total securities firms at the time).
- 2009: he cracked down on a series of insider trading cases by mutual funds to stabilize the market.

02/06: Xi Jinping met with market regulators.

Right after, rumors emerged that regulators would provide regular brief market updates to Xi Jinping.
Though just a rumor, market confidence returned on hopes that Xi Jinping would pay more attention to the market.
Chinese stocks gained from that day onward despite remaining at low levels.

At the same time, the government ramped up share buybacks in the market

Central Huijin Investment - the fund managing stocks directly held by the Chinese government in major financial institutions, announces it will continue to buy back small-cap ETFs in the market.
The department called “national team” (including state-owned financial funds) intervenes: buying ~CNY 70 billion (~USD 9.7 billion) domestic stocks.
- This is not the first time this special team has intervened in the market:
- Goldman Sachs estimates this team will need to buy ~CNY 200 billion in securities (~0.8% market cap) if it wants to stabilize the market.
Foreign investors (possibly including overseas proxies of the aforementioned Chinese government-owned funds) have bought an additional CNY 1.7 billion Chinese stocks on the Hong Kong exchange.
=> causing inflows to return to the market.

… And addressing Margin Call risks:

Traders have to face margin call debts due to rapid market sell-off panic and must follow the market in liquidating the stocks they hold.
Immediately, the China Securities Regulatory Commission announces it will guide brokers to adjust margin call ratios and flexible stock liquidation methods.

… As well as announcing support for M&A and restructuring:

The China Securities Regulatory Commission also announces support for M&A activities and organizational restructuring to enhance the market value of listed companies.

02/05: The reduction in banks' required reserve ratio (announced on 01/24) officially takes effect.

=> Approximately USD 1,000 billion in cash is released and injected into the market, increasing the money supply

=> Stimulating the economy, stabilizing interbank market rates and short-term interest rates.

02/04: China Securities Regulatory Commission strengthens management of financial funds + prevents harmful short-selling transactions and insider trading that significantly impact the market.

Strong measures used include:

Some Quant Hedge Funds are banned from dumping stocks through high-frequency automated trading (High Frequency Trading - HFT).
- FYI: The reason is that HFT by Quant Hedge Funds can amplify the dumping of small-cap stocks.
Others are restricted from reducing stock positions in leveraged market-neutral funds.
Imposing quotas on total return swaps with foreign investors (total return swap offshore).
- FYI: Total return swap offshore is a channel that Chinese investors use to short Hong Kong stocks.

01/29 - 02/4: Chinese market officials also directly meet with companies in 20 provinces/cities listed on the stock exchange

The aim is to resolve issues companies face regarding tax policies, finance, land, import/export, and intellectual property rights…

01/28: Order restricting securities lending issued (to minimize short positions)

Market-makers stop lending certain stocks for short selling.
Strategic investors (strategic investors: investors holding restricted stocks) are also not allowed to lend their stocks during the agreement period.

01/23: Bloomberg reports China considering massive securities bailout packages including:

CNY 2,000 billion (~USD 278 billion), from overseas accounts of Chinese state-owned enterprises, to establish a stabilization fund to buy domestic stocks via the Hong Kong exchange.
CNY 300 billion from local funds to invest in stocks through China Securities Finance Corp. or Central Huijin.

The plan is considered right after Premier Li Qiang calls for “strong” measures to stabilize the market and investor confidence.

01/19: “National team” begins buying a series of ETFs in the market.

01/16: China considers issuing new debt in the form of “special bonds” (ultra-long term) worth CNY 1,000 billion (~USD 139 billion).

In addition to efforts from government agencies, Chinese companies have also endeavored to send signals to the market about their prospects:

The amount of stock buybacks by listed companies has reached the highest level in 3 years.
Listed companies in mainland China and Hong Kong have respectively spent CNY 14 billion and HKD 21 billion to buy back shares last month.

2 - Fiscal and monetary policies supporting the real estate market

02/06: China Financial Regulatory Authority proposes more support for developers real estate to pull the economy out of the quagmire from the housing crisis.

The financial regulatory agency also called on banks to extend loans (+ relax conditions in new contracts) for real estate developers.

02/01: People's Bank of China (PBOC) begins to roll out a low-interest funding package worth CNY 150 billion for housing construction and infrastructure projects.

Also during this time, real estate builders received unexpected notices that their projects qualify for funding under the government's support program.

Previously, the real estate construction sector had difficulties raising cash since the real estate crisis erupted, causing many projects to be postponed indefinitely.

01/ 27: Guangzhou eases home purchase restriction measures to prevent house prices from falling.

Beijing, Shanghai, and Shenzhen also lowered the down-payment requirements for mortgage loans to buy homes from November 2023.

01/26: Ministry of Housing and Urban-Rural Development announced they will provide a list of eligible housing projects for capital support by the end of the month.

Mainland China and Hong Kong announce steps to strengthen financial ties across the two sides, including:

facilitating real estate purchases and expanding permissions for individual investments in the Greater Bay Area (Hong Kong, Shenzhen, and Guangzhou).

01/05: PBOC and National Financial Regulatory Administration (NFRA) announce financial support guidelines to develop the rental housing market

Encouraging banks to lend to developers, industrial parks, and rural enterprises to build long-term rental housing and renovate facilities.

CONCLUSION

Regarding the stock market stabilization measures: the series of events above are very "Chinese" moves - characterized by combining fiscal-monetary stimulus policies and partly imposed government actions on the free market.

Up to now, at least these measures show clear improvements in two aspects:

Investor sentiment has stabilized again (though still weak) due to the government sending strong signals - committing to intensify economic stimulus and control market values
The wave of short-selling Chinese stocks has been controlled.

However, the Chinese government has also intervened deeply in the market with many bans on financial institutions and traders, which is a double-edged sword:

one main part is the commitment to investors on market control,
but the downside is further reducing the freedom of the financial market - losing market dynamism (when HFT trades, financial leverage, and short-selling are overly restricted).

Regarding the measures to improve the real estate market: these measures are mainly through bailout packages for real estate builders and developers.

However, China still lacks specific actions to improve the rock-bottom real estate purchase demand - the most important factor causing the current stagnation of the housing market. Not to mention, consumer spending sentiment may not improve much from PBOC's stimulus packages if housing prices (holding ~66% of people's savings) continue to decline.