SFC Markets and Finance丨China introduced new fiscal policy measures, how will A-share market react?

南方财经全媒体记者杨雨莱 广州报道

China introduced incremental fiscal policy measures

China's Finance Minister, Lan Fu'an, stated at the press conference on October 12th, that the Ministry of Finance will introduce a package of targeted incremental policy measures in the near future.

He explained that this package of incremental policies includes increasing the debt ceiling on a relatively large scale in a lump sum to replace existing hidden debts of local governments and help defuse their debt risks, supporting large state-owned commercial banks in replenishing the core tier-1 capital and etc.

What are some highlights and messages delivered through this press conference? Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company Limited provided his thoughts for us.

Strong support for the real estate market 

Dong Ximiao: I believe there are three main highlights from the press conference held by China's Ministry of Finance this morning.

First, China will introduce incremental fiscal policy measures to support the development real estate market. This includes allowing special treasury bonds to be used for land reserves, thereby supporting local governments in reclaiming eligible idle land stocks; permitting special treasury bonds to acquire existing commercial housing for use as government-subsidized housing in various regions; and adjusting and optimizing taxation policies related to real estate.

Since September, there have been frequent adjustments to real estate financial policies, including lowering the down payment ratio of housing loans, reducing interest rates on existing mortgage loans, and optimizing re-lending facility for government-subsidized housing. The newly introduced fiscal policy measures will work in tandem with financial policies to create a synergistic effect, better supporting the real estate market's stabilization and recovery. It should be noted that, with the intensive support of a series of policies, the "policy bottom" of the real estate market has emerged, and the "market bottom" is being fortified at an accelerated pace.

Enhance the robustness of large commercial banks

Dong Ximiao: Second, the issuance of special treasury bonds is aimed at supporting large commercial banks in replenishing their core tier-1 capital. Impacted by economic downturn and structural transformation, the net interest margin of large commercial banks has declined to an all-time low, falling below the average level of commercial banks. This has led to increasing pressure on asset quality and a significant impact on profitability. The ability to replenish capital through the internal channel of profit retention has continued to decline.

Therefore, adopting measures to increase the core tier-1 capital of six large commercial banks will enhance their robustness in development and their ability to serve the real economy. This will better fulfill their crucial role in the financial system and promote financial stability and high-quality development.

Simultaneously, efforts should be made to support small and medium-sized banks in accelerating the establishment of a long-term mechanism for capital replenishment, broadening their capital replenishment channels, and enhancing their capital replenishment capabilities. This includes appropriately optimizing shareholder qualification criteria, simplifying approval processes, supporting small and medium-sized banks in introducing qualified shareholders for additional capital and share expansion, easing access conditions, and encouraging them to issue preferred stocks,  perpetual bonds, convertible bonds, and tier-2 capital bonds.

The previewed policy space gives confidence

Dong Ximiao: Third, the next step in policy space will be previewed to stabilize market expectations and confidence. At the press conference, Lan Fo'an, the Minister of Finance of China, pointed out that counter-cyclical adjustments encompass not only policies that have entered the decision-making process but also other policy tools currently under study. He emphasized twice that the central fiscal authority still has significant room for borrowing and raising the deficit. Additionally, He indicated that over the next two years, a series of well-prepared, tangible, and accessible reform measures, are planned to be launched concentratedly, particularly those related to foundational systems at the top-level design stage, such as improving the budget-management system and refining the financial transfer payment system.

Today's statements from the China's Ministry of Finance, while adhering to decision-making mechanisms, have released positive signals in advance, addressed market concerns, and contributed to stabilizing expectations and boosting confidence. 

The outlook of policy intensification

Many experts have paid attention to the statement of “There remains considerable room for China's central finance to issue debts and expand deficit” at the press conference.

Starting from September 24th, China's Central Government has recently intensified the introduction of a package of incremental policies to promote the continuous recovery and improvement of the economy.

Will the fiscal policy and monetary policy continue to be intensified? What expectations are there for further policy adjustments? Wang Qing, the chief macro analyst of Golden Credit Rating brought his idea for us.

The special bonds may further increase

Wang Qing: The newly announced policy today mainly involves intensifying debt resolution efforts and issuing ultra-long-term special bonds to bolster the capital of major banks. The Ministry of Finance emphasized that counter-cyclical adjustments go beyond just these measures, with other policy tools also under consideration. They particularly emphasized that the central fiscal authority still has significant room for borrowing and raising the deficit.

We believe that by effectively bridging the gap in broad fiscal revenues, ensuring essential fiscal expenditures, and boosting short-term growth, fiscal policy may further increase the issuance of general or ultra-long-term special bonds. The primary goal is to drive consumption or investment. This will fully leverage the PBOC's deficit and borrowing capacity, and ease the fiscal burden on local governments in stabilizing growth, which serves as a key point in the next phase of growth stabilization efforts.

The reserve ratio will be expected to lower at Q4

Wang Qing: In terms of monetary policy, large-scale bank lending is expected in the fourth quarter. The issuance of various government bonds will also significantly increase. The PBOC will coordinate and support these efforts through its monetary policy. This is why, on September 24, the PBOC announced that depending on market liquidity conditions, it may further reduce the reserve requirement ratio by 0.25~0.5 points later this year.

Based on the policies released by the Ministry of Finance today, we estimate that the PBOC will lower the reserve ratio by another 0.5 points in Q4, releasing about RMB 1 trillion into the banking system.

Taking all factors into account, we believe the fiscal stimulus in this comprehensive policy package will exceed RMB 4 trillion. This is higher than the current market expectations, and will directly boost Q4 GDP growth to over 5.0%, helping to achieve the full-year growth target of around 5.0%. 

What will be the next move of A-share market?

In terms of the capital market, what kinds of impact will the incremental policy measures may bring to the A-share market next week? After experiencing significant adjustment of the market in the previous weeks, will the A-share market turn into a more stable growing market? What are some other suggestions for investors' layout in A-share market? We have invited Zhao Jian, the Head of Atlantis Finance Research Institute to join our conversation.

The positive signals brought to China's capital markets

Zhao Jian: Based on the overall impression and content of the Ministry of Finance press conference, I believe next week will bring solid support for China's capital markets, including Hong Kong stocks. From today’s press conference, in my view, it sends a rather positive signal. Firstly, the focus is on the arrangement of special bonds. This year's budget for special bonds is significantly higher than last year's, with a substantial issuance planned for the next three months. Over the year, the total issuance will reach 3.9 trillion yuan, with 2.3 trillion yuan issued for the fourth quarter. Therefore, we can expect strong fiscal support for the economy in the third quarter, which will certainly provide a considerable boost to the stock market. 

Another important point is that some special bonds will be used to supplement the tier-1 capital of commercial banks. This is crucial because special bonds can be converted into tier-1 capital. We know that commercial banks, in accordance with the Basel Accord, can have a leverage ratio of more than 12 times. if you have 100 billion yuan in special bonds to supplement the tier-1 capital of commercial banks, then you can multiply by 10, and have 1.2 trillion yuan in funds available for actual competition. This is very important.

Thirdly, a very important point and highlight of this Ministry of Finance’s press conference, is giving us a space for imagination, including the very firm tone of our Minister Lan's speech, the overall remarks are quite positive, which means we are not limited to these measures, we still have many, many tools left unused. This must provide the market with enough, ample space.

A steady upward trend with volatility ahead 

Zhao Jian: The September 24th meeting and the subsequent political sessions represent the implementation of China’s high-quality financial development or the spirit of a healthy capital market. Through the government's policies, the market is being revitalized. Once the market heats up, it stimulates the enthusiasm of a broad range of investors, especially retail investors. 

We must remember one thing: rapid surges do not constitute a bull market. A true bull market is one that gradually creates value for investors and provides financing services for high-quality listed companies. It is not about getting rich overnight; this is not a genuine bull market. A bull market follows its own objective laws. In the early stages, its reflexivity is triggered by policies, but gradually, you can't rely on policies alone. Continuous easing is certainly not sustainable. Instead, investor confidence needs to be warmed up gradually. 

As the economy slowly recovers, accompanied by the expansion of fiscal policies in the real economy, the real economy also begins to recover. Along with this recovery, there is an overall valuation correction, and the market gains more upward momentum. This is the early stage buildup. With the conclusion of market adjustments and investor education, combined with the Ministry of Finance's policies that solidify confidence and expectations for the future, people are no longer solely relying on policy and liquidity measures. We can't just depend on easing; we also place hope in the recovery of the real economy and the resolution of risks in the real estate sector and local government debt.

In this way, our risk appetite will gradually rise. As it increases, we will enter a very clear second phase of the bull market, characterized by volatile upward movement. There will still be fluctuations, but the overall trajectory will move higher. After the real economy and fiscal policies take effect, the recovery of listed companies and the broader real economy will further support and, in turn, bolster the stock market, creating a virtuous cycle. This will lead to the market entering a slow bull phase.

At present, I believe this is a possible scenario. However, I believe that next week, we might enter a relatively steady upward trend with some volatility, as people gradually calm down. The market will transition from a wild, passionate bull to a quieter, more rational, and calm one. I believe this is something we can look forward to.

Maintain a certain position in the stock market

Zhao Jian: With the A-share market entering the grand opening and closing, it has entered a relatively stable range of shocks. I think we can keep a certain position. If you think this is a long-term slow bull market, the bottom position is very important.

In my experience, if the market rises too high,  then gradually sell off growth and startup stocks, and then increase the blue-chip and high-dividend stocks. Wait until after the economic fluctuations to make adjustments.

The overall strategy is to maintain a certain position in the stock market if you believe this is a long-term bull market. Additionally, it's important to have the concept of asset allocation and sector rotation, to seek out quality companies with a strong moat. In that case, it's feasible to hold your stocks steady.

（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）

策划：于晓娜

监制：施诗

编辑：李依农 

记者：杨雨莱 梁旭琦 李依农

制作：李群 蔡于恬 

新媒体统筹：丁青云 曾婷芳 赖禧 黄达迅

海外运营监制: 黄燕淑

海外运营内容统筹: 黄子豪 

海外运营编辑：庄欢 吴婉婕 龙李华 张伟韬

出品：南方财经全媒体集团