Returning to their offices and workplaces last week from the National Day break, China’s investing public had just one thing on their minds: the stock market. Within 20 minutes of the market opening, Rmb1tn ($141bn) in equity had changed hands. By the end of the day, turnover had hit a record Rmb3.48tn, amid gyrations in prices. It was a display of animal spirits such as China has not seen for some time. The benchmark CSI index has pulled back over the past week, but it is still up by more than 20 per cent in a month.
The sharp market rally marks a partial success for the Chinese authorities, who triggered it with last month’s stimulus package, highlighting the continued potency of their policy toolbox. To turn the rally to good account, the authorities need to follow through in two directions. First, they need to deliver promised reforms to promote better corporate governance, which will underpin a more stable and attractive equity market. Second, they need to tackle China’s underlying deflationary dynamic, by far the greater problem. Boosting the stock market is, in itself, one part of the solution, but stock prices rest ultimately on corporate earnings — and they depend on a strong economy.
In addition to a 50 basis point cut in interest rates, China’s recent stimulus has two elements targeting the stock market. First is a swap line, sized at an initial Rmb500bn, that will let brokers, fund managers and insurers tap central bank liquidity against the collateral of stock and bonds. The second is a Rmb300bn relending facility that will, via banks, provide cheap loans for public companies that wish to buy back shares. These measures are reminiscent of those taken by central banks such as the US Federal Reserve in the wake of the 2008 financial crisis. Together, they will provide a significant injection of funds into the stock market, and justify a degree of investor enthusiasm.