Comments from David Townsend, Managing Director of Value Partners Group’s EMEA Business on Asian equity markets.
Asian equity markets rallied last week, mainly driven by several supportive measures from Chinese policymakers. In light of these positive surprises, David is expecting investor sentiment to remain optimistic.
What happened?
While the market has been expecting some supportive measures amid the weak China macro data recently announced, the timing and magnitude of the latest supportive measures from China exceeded market expectations this week. These supportive measures focus on four key areas:
Capital market support:
The People’s Bank of China (PBOC) will allow securities firms, funds, and insurance companies to tap central bank funding and buy stocks in the form of security swaps (i.e., the financial institutions pledging stock assets to swap for government bonds and then obtain funding to buy more stocks), with an initial funding of RMB500 billion. Meanwhile, a RMB 300 billion worth of specialized relending facility will also be set up – facilitated by the commercial banks – for listed companies and major shareholders to buy back their own shares.
RRR cut:
The bank’s reserve requirement ratio (RRR) was cut by 50bps, which is expected to release about RMB1 trillion in long-term liquidity to the banking system. The PBOC may also deliver another 25-50bps RRR cut by the end of this year.
Policy rate cut:
The lowering of the seven-day repo rate from 1.7% to 1.5%, which, according to PBOC Governor Pan Gonsheng, should lower the loan prime rate (LPR) and deposit rates by 20-25bps.
Property supports:
Banks are encouraged to trim interest rates on existing mortgages by 50bps on average. The down payment will also be lowered to 15% from 25% for second-home purchases, in line with first-home buyers. Moreover, PBOC’s funding support will be increased from 60% to 100% for the RMB300 billion relending program for affordable housing.
David Townsend, Managing Director, EMEA Business at Value Partners Group, commented:
“We expect sentiment to remain optimistic in light of positive surprises from China. A surprise Politburo meeting was also held last week, with pledges to support the ailing property market, with the market expecting an up-and-coming large fiscal stimulus. The latest supportive measures clearly indicate that top policymakers are keen to reflate market confidence, and we expect more supportive measures to follow. Within China, we are positive on internet, e-commerce, and consumer staples.”