China’s Stimulus Measures: What Will Be the Impact on Markets?

China has introduced a comprehensive set of stimulus measures aimed at revitalizing its struggling economy, stabilizing the housing market, and restoring investor confidence.

During a press conference, regulators presented a series of bold actions. A key feature of these measures includes rate reductions across the board, encompassing the reserve requirement ratio, mortgage rates, and down payment rates.

In addition to these cuts, focused initiatives have been launched to boost stock market investments and encourage long-term capital inflows.

One of the most notable measures is the creation of a RMB500 billion swap facility, designed to allow non-bank financial institutions (NBFIs), such as brokers, insurers, and funds, to enhance their leverage and stock investments. Analysts have pointed out that these institutions are permitted to use funds from the swap exclusively for stock investments, which may increase their exposure to market fluctuations and balance sheet volatility.

Another initiative involves RMB300 billion in targeted re-lending from the People’s Bank of China (PBOC) to help banks extend loans to listed companies and their shareholders. These funds, offered at a 2.25% interest rate, are intended to facilitate share buybacks and stock acquisitions.

According to analysts, this strategy is expected to positively impact the market and assist brokers in preventing forced liquidations in the short term, while also linking banks more closely to the stock market.

Moreover, the PBOC is promoting wider participation in the stock market through long-term investment vehicles, such as stock index exchange-traded funds (ETFs), insurance funds, and enterprise annuities. Insurers are being encouraged to establish private funds, taking inspiration from a pilot project initiated by notable life insurance companies. Additionally, a reduction in mutual fund fees may further enhance market liquidity.

The government is also set to streamline the mergers and acquisitions (M&A) process, easing restrictions on valuations and introducing new guidelines. Analysts have suggested that these changes could lead to a significant uptick in M&A activity over the next six to twelve months, benefiting brokers with strong investment banking operations.

Analysts anticipate that these decisive measures will deliver immediate liquidity, particularly benefiting China’s A-share market. They predict that the market will see an influx of new liquidity from both banks and NBFIs. Furthermore, if the market sustains positive performance, it may attract the return of retail and overseas investors, helping to stabilize conditions further.