Is this the turning point for Chinese equities?

The People’s Bank of China (PBOC), in collaboration with other financial regulators, last week unveiled a broad stimulus package aimed at invigorating the Chinese economy and stock markets.

Investors reacted strongly, driving both the onshore CSI 300 and offshore Hang Seng indices up by more than 4% on the day, with gains continuing during the week together with announcements of further fiscal support for both the property and retail sectors. Between Tuesday and Thursday last week, the CSI 300 and Hang Seng indices were up 10.9% and 9.2% respectively, measured in dollar. These moves marked the largest intraweek rallies since China abandoned its strict zero-Covid policies in late 2022, reflecting renewed market confidence in the effectiveness of the stimulus measures — surpassing the impact of previous efforts over the past 18 months.

Individually, none of the newly announced stimulus measures is particularly groundbreaking. However, the simultaneous introduction of multiple initiatives, combined with the assurance of further support if necessary, has made a significant impact. While the PBOC may not have the same monetary arsenal as the US Federal Reserve, it has come out guns blazing. Key measures include:

• Lowering mortgage rates: Commercial banks are guided to reduce interest rates on existing mortgages by an average of 0.5%, expected to save 150-billion yuan annually.

• Easing property sector constraints: Down payment requirements for first and second property purchases have been cut to 15%, supporting the property market.

• Funding unsold properties: The PBOC will fund local governments and state-owned enterprises to buy unsold properties up to 300-billion yuan.

• Boosting market liquidity: A 0.5% cut in the reserve requirement ratio (RRR) is expected to inject 1-trillion yuan into the financial system, with the potential for further cuts.

• Considering adding: An additional 1-trillion yuan to recapitalise top state-backed banks.

• Interest rate adjustments: The seven-day reverse repo rate has been reduced by 0.2%, bringing it to 1.5%, while the one-year rate was cut by 0.3%, now standing at 2%.

• Stock market support: Financial institutions will receive 500-billion yuan in funding to purchase stocks, along with 300-billion yuan in low-cost financing (about 2.25%) for listed companies and shareholders to buy shares. Additional rounds of 500-billion yuan and 300-billion yuan are promised if the initial round proves effective.

• Cash vouchers: To boost consumption for lower-income groups.

• Sovereign bond issuance: Though unconfirmed, the possible issuance of 2-trillion yuan in long-term sovereign bonds to support local governments and stimulate consumption signals strong fiscal intervention. These bonds could help tackle the debt crisis facing many local governments while simultaneously boosting economic activity.

Moreover, the chief of the China Securities Regulatory Commission has confirmed that state-backed financial institutions will increase long-term investments in the stock market.

Recent rallies in Chinese markets have been encouraging, but investor caution persists given the fading momentum of previous recoveries over the past 18 months. However, this moment may offer the best opportunity yet for a sustained rally — provided that all promised follow-up policies are implemented in the coming months.

The stimulus policies announced this week are as close to China’s “Whatever it takes” moment as we have seen. As the US Fed embarks on an aggressive rate-cutting cycle, the PBOC has greater leeway to ease monetary policy without exacerbating the interest rate gap between the dollar and yuan. Additionally, the yuan’s recent appreciation — up by about 3.5% over the past two months — eases pressure on the PBOC to defend the exchange rate, allowing for more aggressive interest rate cuts.

The past 3½ years have been tough for Chinese equity markets, yet the underlying economic and market fundamentals have shown remarkable resilience. China’s economy is steadily advancing towards a strong post-Covid recovery, albeit later than many other global economies. Despite this, its stock markets remain priced as though a catastrophic collapse is imminent. With valuations around a quarter of Japanese equities at the bottom of their 1991 crash, both mainland (onshore) and Hong Kong (offshore) markets present substantial value opportunities. A sustained shift in investor sentiment could be all that’s needed to ignite a significant rally.

As global markets remain volatile, China’s recent stimulus package appears to be a turning point not only for Chinese equities but also for global investors seeking diversification. The package reflects China’s determination to bolster its domestic economy and restore both investor and consumer confidence. The easing of mortgage rates and the promised cash vouchers will increase disposable income for homeowners, which will boost the consumption side of the economy, driving China’s future GDP growth. Additionally, liquidity injections via the RRR cuts offer much-needed support for financial institutions, revitalising stock market performance.

For South African investors, who typically have limited direct exposure to China and allocate 60%-70% of their offshore portfolios to US equities, this may be an ideal moment to consider rebalancing. With US markets trading at historically high valuations, reallocating some profits into Chinese equities could position investors for long-term growth and diversification benefits. Given China’s focus on structural reforms for high-quality economic growth and more sustained stimulus efforts, this moment might mark the beginning of a more enduring rally in Chinese markets.

* Pan is head of strategy & product at Prescient China