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On the 25th of September, representatives of China’s economic apparatus – led by People’s Bank of China (PBOC) governor Pan Gongsheng, minister of the National Administration of Financial Regulation Li Yunze and China Securities Regulatory Commission chairman Wu Qing – announced a historic economic stimulus package that simultaneously included rate cuts, reserve requirement ratio (RRR) cuts and structural monetary policies.
The PBOC beat analysts’ expectations of a series of 10-point basis point rate cuts by lowering the benchmark seven-day reverse repo rate from 1.7% to 1.5% – double that of expectations – leading to interest on the one-year medium-term lending facility being lowered by 0.3% while the loan prime rate was lowered by between 0.2 to 0.25%. Further 10-basis point cuts might be in the offing. While this will also enable the lowering of mortgage rates by around a half a percentage, China’s fraught real estate sector is generally not expected to see a significant improvement in outlook.
The lowering of the RRR – the amount of cash that commercial banks must hold as reserves – by 0.5% is expected to bolster banks’ profitability as it frees up capital being held up at a lower rate of return. However, given the PBOC’s repo operations, this isn’t expected to bring in significant additional liquidity to the public lending market. Despite the down payment ratio reduced to 15% from 25% for second-home purchases – thus effectively bringing it in line with the policy on first-home purchases that was announced in May – general sentiment in the real estate sector isn’t expected to vastly improve as households are not expected to be swayed into making additional purchases.
A $42.5 billion (300 billion yuan) fund set up in May that would encourage local and provincial governments to buy up unsold properties to be repurposed as subsidized housing was also bolstered wherein Governor Pan stated that up to 100% of the loans made to the fund could be funded by the central bank – a quantum leap from the maximum of 60% announced in May.
To bolster valuations in China’s financial markets, a structural monetary policy facility of $70.9 billion (500 billion yuan) was announced as being in the works that would enable financial houses operating in China to effectively swap their assets in exchange for liquidity to purchase high-quality stocks. Additionally, a $42.5 billion (300 billion yuan) relending facility has been established to guide banks support listed companies’ stock buybacks and purchases at a relatively modest 1.75% interest rate.
As a result, China’s domestic stocks registered a massive swing up that day, with virtually no prominent ticker in the Shenzhen Stock Exchange dipping red.
Source: FinViz
Households Under StressChina’s three engines of growth are (i) exports, (ii) infrastructure and real estate, and (iii) domestic consumption by its 1 billion-plus citizens. While the bulk of the fiscal stimulus measures are aimed at financial institutions and markets, the core fact remains that real estate markets remain moribund while infrastructure spending has saddled China’s municipal and provincial governments with $13 trillion of debt, much of which is held by Chinese financial institutions. There is little solace by way of domestic spending: China’s household spending is 20% below the global average by accounting for only 40% of its total Gross Domestic Product (GDP). Towards the problems with local governments and household spending, the government also announced a host of measures that will be financed via “special bonds” of varying designs.
China’s “special bonds” have already been hot in markets this year, with the government pledging to issue $137 billion (1 trillion yuan) in special sovereign notes in 2024 alone .In June, the sale of 50-year bonds valued at $4.8 billion attracted demand that was 5 times that of supply, while the sale of $5.5 billion (40 billion yuan) of 20-year bonds in May saw demand at 4 times that of supply. The bulk of the demand is estimated to be from China’s retail investors switching from stocks to “safer” bonds, prompting authorities to urge investors via state media to be “more rational”. On the 26th of September, China’s Ministry of Finance (MOF) was reported to be mulling raising 1 trillion yuan in special sovereign debt to bolster consumption via increasing subsidies for the trade-in and renewal of consumer goods and for the upgrade of large-scale business equipment. Also included are arrangements to provide a monthly allowance of 800 yuan per child (excluding the first child) to households with more than one child. Another 1 trillion in special sovereign debt is being mulled to finance local governments buying up unsold properties, which could potentially free up household incomes.
With both financial systems and consumer markets potentially satiated, the rally seen on the 26th of September in China’s stock markets continued to push total market levels well beyond what was witnessed over the past year through most of the subsequent week and into October.
Source: Leverage Shares analysis
However, market conviction began to fade by the end of the second week of October with downturns manifesting again. The reason for this is somewhat nuanced: while domestic sales and exports are ostensibly supposed to be independent engines, in reality, they are now increasingly attuned to one another. For instance, when considering auto sales versus retail sales of both new and used goods as well as export trade volumes over the past six years:
Source: Leverage Shares analysis
it can be empirically established that the overall independence of the “outside” (exports) from the “inside” (retail and auto sales) showed signs of faltering shortly after the pandemic manifested, following which they were increasingly correlated. As of the end of August, while exports show slightly positive trends relative to the start of the year unlike auto and retail sales, they’re far and away from the peaks seen at the end of 2021.
As of May, factory prices had been in decline for 20 months in a row while consumer price changes were trending below estimates. While it was (on the whole) cheaper to buy goods, consumer confidence in high-value spending remained bleak. This is particularly noticeable in auto sales: despite a grueling two-year price war being waged in China’s massively-fragmented auto market with a goal towards consolidating the industry that essentially makes it a buyer’s market, total growth in sales volumes as of the end of August are essentially flat relative to September 2018. Meanwhile, the outlook for export trends remains cloudy as plans for geographic substitutions to Southeast Asia, India and Latin America continue to roll out, further imperiling the outlook for consumer spending at home.
As it stands, markets determined that the volume of consumer spending stimulus fell short by several miles to be a sustained course correction in consumer habits which – in turn – weighed down the forward valuation of most publicly-traded Chinese companies.
Further Stimulus Incoming?As market favour faded, the Chinese government’s economic apparatus held another meeting on the 12th of October wherein China’s Finance Minister Lan Fo’an announced that the government is considering significantly increasing debt via special bond issuances to prop up local governments. Although light on figures, China’s business media publication Caixin Global reported that the government is considering issuing $850 billion (6 trillion yuan) over the next 3 years.
Meanwhile, on the 15th, the last remaining bright spot in China’s three engines – exports – missed expectations by reporting a 2.4% growth in September versus a forecast of a 6% increase. Meanwhile, imports only edged up 0.3% versus an expectation of 0.9%, which has an interesting consequence for its exports over the next few months: a little under a third of China’s total imports are parts to be used for re-exports mostly in the form of electronics. This weakness in imports growth seems to imply that the forward outlook for exports in the coming months will be grim.
When firing on all cylinders, China’s three engines may be exponential and multiplicative. However, when they falter, they seem to misfire together. It is entirely possible that a bloodletting is in order before market convictions in Chinese tickers show a long-term positive. As of right now, market breadth is fading, which might be a net advantage for a handful of big tickers in the Middle Kingdom. The broad “China growth” story might have hit pause for now.
Professional investors in Europe can consider tactical plays to boost returns or hedge against declines in their core China holdings. The +3X Long China ETP (ticker: CHI3) and the -3X Short China ETP (ticker: CHNS) offers magnified exposure to the performance of the iShares MSCI China ETF on the upside and downside respectively.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
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Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
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