Dear audience, welcome to “The Observation by Qin Peng”.
Today’s focus: The rare significant support for the market by the three financial ministries of the CCP has arrived. Is this an excellent investment opportunity, or the last chance to flee? As ordinary people, what can we do?
Xi Jinping is in a hurry, as the four major economic crises in China are about to erupt. Trump said, “If I am elected, I will be the first to call Chairman Xi: ‘He will foot the bill’.”
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On Tuesday, the CCP government finally unveiled its market rescue measures. The scale of the measures exceeded expectations, leading many to excitedly exclaim, “Royal Flush! Cuts in reserve ratios, cuts in interest rates, buying stocks with housing money, the central bank is really going all out!” “The central bank is borrowing money to urge you to buy stocks, with interest rates lower than government bonds!”
As a result, on Tuesday, the Shanghai Composite Index returned to 2800 points, closing at 2863.13 points, up 4.15% from the previous trading day, marking the largest single-day increase in over four years. The Shenzhen Component Index and the ChiNext Index also rose by 4.36% and 5.54% respectively. The FTSE China A50 Index surged by over 6%.
In terms of exchange rates, the US dollar against the Renminbi also rose to 7.03. It is evident that the market views these policy measures as a major boon for the Chinese economy.
So, what impact will this round of the largest daring CCP market rescue have, and what actual effects will it bring? Let’s analyze in detail today.
On the morning of September 24th, at a press conference at the State Council Information Office, the CCP’s central bank governor Pan Gongsheng, the head of the China Banking and Insurance Regulatory Commission Li Yunze, and the chairman of the China Securities Regulatory Commission Wu Qing jointly announced a series of policies focusing on three major measures:
Firstly, interest rate cuts and reserve requirement cuts. Pan Gongsheng pointed out that the reserve requirement ratio will be reduced by 0.5 percentage points in the near future, providing approximately 1 trillion yuan of long-term liquidity. Within this year, there may be further reductions in the reserve requirement ratio by 0.25-0.5 percentage points, indicating an additional 500 billion to 1 trillion yuan on the way. Simultaneously, interest rates will be lowered, with the 7-day reverse repurchase operation rate being reduced by 0.2 percentage points.
Secondly, lowering interest rates on existing mortgage loans, with an average reduction of 0.5 percentage points. This will save a total of 150 billion yuan in interest for buyers on 30-year loans; the minimum down payment for a unified mortgage is now set at 15%, while the minimum down payment for a second home loan is currently 25%.
Thirdly, the establishment of new stock market loan tools to provide liquidity to the stock market, which includes two aspects: 1. For securities companies, fund companies, and insurance companies, they can obtain funds by pledging assets to the central bank to increase stock holdings; 2. For listed companies themselves, guide commercial banks to provide loans to listed companies and major shareholders to support stock buybacks and increases. This is also a form of central bank backstop.
Pan Gongsheng mentioned that the initial size of the refinancing swap created for financial institutions is 500 billion yuan, with the possibility of second and third installments of 500 billion each. For share buybacks conducted by listed companies, the initial amount is 300 billion yuan, which can also be increased.
Considering the total liquidity injection across these three measures, the initial figure amounts to 1.8 trillion yuan. If the saved mortgage interest of 150 billion yuan is included, the total reaches nearly 2 trillion yuan. The scale is immense and extremely rare.
During the Q&A session, Pan Gongsheng also mentioned the establishment of a stock market stabilization fund, stating that it is under study. This move also provides a “shot in the arm” for the stock market.
So, how should we understand this intense stimulus? I believe three sentences can summarize it:
Firstly, this is an emergency market rescue due to deflation and an economic growth crisis in China, and Xi Jinping is feeling the urgency.
Secondly, to comprehensively address the crisis, the existing funds are not enough and can only be seen as an initial down payment, just enough to use as a shot in the arm.
Thirdly, although the authorities may be considering a rescue package of 1 trillion yuan, Xi Jinping has not yet made a firm decision.
According to Bloomberg, the joint briefing held by the three financial ministries in charge of finance was arranged in a hurry by Xi Jinping in the past 48 hours. In the weeks leading up to this, CCP leaders have grown increasingly anxious as they found in several unanticipated internal meetings that this year’s economic growth target is unattainable.
At least one official from a major coastal province openly admitted powerlessness in achieving the 5% annual GDP growth target. Consequently, last week, the Central Government ordered financial regulatory officials to provide more information, leading to preparation work through sleepless nights for Tuesday’s briefing.
Aside from the failure to meet the GDP growth target, what is most concerning is that most economists agree that China needs to take more measures to avoid entrenched deflationary pressures. This was further emphasized by the former head of the CCP People’s Bank of China, Yi Gang, on September 9th when he stated that the primary focus of China’s economy going forward would be to prevent deflation. At that time, based on the GDP deflator, China had experienced the most severe deflation since 1999.
Looking at the direction of these monetary policies, they appear to be quite targeted, directly addressing four major economic crises in China, but the scale is still insufficient:
1. Addressing the real estate crisis. Lowering down payments and interest rates on existing home loans has been well received by the public. However, when it comes to buying a house, people remain cautious. The domestic economy in China largely relies on new home purchases to drive growth.
From January to August 2024, the total sales of the top 100 real estate companies in China amounted to 2.68324 trillion yuan, marking a 38.5% year-on-year decrease. To comprehensively rescue the real estate sector, a funding scale of approximately $1 trillion may be needed. However, in early August this year, the Chinese authorities rejected the International Monetary Fund’s proposal to use central government funds to complete unfinished housing projects.
Therefore, the measures fall short of being effective, proving challenging to change the overall market situation.
2. Addressing weak consumption and its acceleration. Despite the statistical embellishments by the CCP National Bureau of Statistics, recent data from Beijing and Shanghai have shocked outsiders. In August, Shanghai’s total social retail sales fell by 6.8% year-on-year, accumulating a 3.3% decrease from January to August. In Beijing, social retail sales in August dropped by 2.1%. In the first half of this year, the total profits of Beijing’s designated above-quota catering enterprises were only 180 million yuan, plummeting by 88.8%; while Shanghai’s designated above-quota accommodation and catering enterprises recorded significant losses, amounting to -770 million yuan.
With significant funds flowing into the stock market now, it remains uncertain whether ordinary retail investors can profit in the long run – more on that later. As for existing home loans, the savings generated are apparently limited. For a business loan amounting to 1 million yuan, calculated on a 30-year repayment basis, the monthly installment savings are around 280 yuan, which is far from enough to offset people’s concerns regarding employment and the future.
The third major crisis is the escalating global trade tensions. The massive market stimulus by the CCP will signal improvements in the Chinese market, a contributing factor to the appreciation of the Renminbi. However, this does not entirely negate the negative factors.
Currently, overseas investments and industrial supply chains are accelerating their withdrawal from China. This stems from factors such as increased US-China tensions, CCP’s anti-foreign propaganda, and the backlash from aggressive exports.
The CCP is now attempting to revise its anti-Japan propaganda tone, with the Chinese Ministry of Foreign Affairs praising the act of Chinese citizens sending flowers to Japan and stating it reflects the simple emotions of the Chinese people. However, a significant number of nationalist Chinese netizens remain unconvinced. Since the Syria incident involving BB machines, a large group of nationalists has been amplifying the dangers of iPhone explosions. They may not fully realize that the Apple supply chain has generated 5 million job opportunities in China. These deepening hostile sentiments will incur costs.
Moreover, the employment crisis in China is increasingly severe. On September 23rd, renowned actor Huang Bo was stopped by passersby in Qingdao and asked for help: “I beg you, can you help me find a good job to save me?”
According to the CCP’s latest official data, the urban unemployment rate for 16 to 24-year-olds, excluding students, was 18.8% in August, reaching a new high for the year. As for the actual numbers, no one knows.
The fourth crisis is the financial crisis. Many may question why the People’s Bank of China needs to create tools to support the stock market. This is because the stock market continues to decline, with state-owned securities, fund companies, and insurance companies facing a deadlock, potentially leading to forced liquidation. Hence, rescuing the stock market ultimately aids these state-owned enterprises and financial institutions.
However, without resolving issues in the real economy, the excitement in the stock market is unlikely to last. Additionally, lowering interest rates may also narrow the interest rate spread for commercial banks, further increasing their risks.
Many have noted that at Tuesday’s press conference, only financial regulatory institutions were present, and the Ministry of Finance was absent. This has led many to speculate about future stimulus policies by the authorities. Some also believe that the next big move might align with a policy suggestion made last week by Liu Shijin, former Deputy Director of the State Council Development Research Center, who proposed that the authorities implement a comprehensive stimulus package to boost domestic demand: “By issuing ultra-long-term national bonds as the main source of funding, within one to two years, a minimum economic stimulus scale not less than 10 trillion yuan will be formed.”
The 10-trillion figure easily evokes memories of the CCP’s “4 trillion stimulus” program in 2008. Sharing similar views is Chief Economist Li Xunlei from Zhongtai Securities, with even more radical proposals: issuing 5 trillion yuan of special long-term bonds annually for the next ten years, totaling 50 trillion yuan.
Now, does the 10-trillion economic stimulus plan hold promise? Liu Shijin mentioned that in 2008, when the overall economic volume in China was around 30 trillion, the 4 trillion stimulus sufficed. Since last year, China’s total economic volume has reached 126 trillion, suggesting a stimulus scale proportionate to 10% of the GDP total could be established.
While this argument appears reasonable, CCP advisors may have overlooked two aspects:
Firstly, while 2008 was amid a global financial crisis, the Chinese economy was on an upward trajectory. People were confident about the future, leading the 4-trillion stimulus to stimulate local and private investment totaling up to 30 trillion. The current scenario, however, is the opposite – consumers and entrepreneurs are mostly stagnant. During a recent in-depth conversation with a Chinese entrepreneur, they disclosed that Chinese entrepreneurs are generally hesitant to invest now, fearing being exploited like sacrificial lambs.
Secondly, the current scenario has significantly increased leverage for businesses and individuals. Therefore, unless modeled after Abenomics’ three arrows, especially boosting government fiscal spending to absorb corporate and individual debt burdens, thus making individuals more comfortable spending, China cannot escape deflation.
However, the problem lies in the CCP’s inability to genuinely rescue livelihoods. Not long ago, the CCP announced the postponement of retirement and extended the payment period for pensions. On September 19th, Chinese Premier Li Keqiang, during a video conference for the gradual implementation of the progressive extension of the statutory retirement age, called on all regions and departments to elevate their political standing and align thoughts and actions with the decisions of the Party Central Committee. This essentially indicates that this policy was directed and deployed personally by Xi Jinping. The CCP’s true intentions lie in reducing the burdens for the Party, trimming the ‘leeks’ – this is the genuine focus of the Central Government.
Therefore, I believe that the hoped-for 10 trillion yuan stimulus, not only faces challenges in scale but the actual allocation of funds also may not prioritize sectors such as education, healthcare, and social housing, as some experts anticipate.
In particular, considering the consistent expansionist ambitions of the CCP, international relations are unlikely to improve.
This year marks a critical year with the US presidential elections, yet regardless of who wins, the CCP is unlikely to change. On Monday, former US President Trump stated that if he was re-elected, his first call would be to Xi Jinping, demanding fulfillment of previous trade agreements.
Trump said, “I will say, ‘You must fulfill the agreements we made. We reached an agreement. You will purchase $50 billion worth of US agricultural products.’ I assure you that he will buy it.”
“My second request will be, ‘You must sentence fentanyl traffickers to death.'”
The demands are not excessive, but I believe if the CCP were willing to fulfill these commitments, they would have done so long ago.
Hence, I have reservations about the current CCP monetary policy stimulus and the upcoming large-scale fiscal policy stimulus. While there may be some short-term gains, they are unlikely to be sustained.
Therefore, for ordinary investors, the best course of action might be to seize the opportunity to exit:
1. Take advantage of existing home loan policies to reduce interest expenses and improve cash reserves;
2. Sell off any stocks stuck in a losing position during market highs;
3. Refrain from buying new homes or making rash investments;
4. Timely convert funds to USD, preferably transferring them abroad. Given the CCP’s aim to stimulate exports, the Renminbi exchange rate is unlikely to remain high for an extended period, and intervention will occur.
What are your thoughts on these matters?
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