Market participants in China got the much-awaited reforms. However, there is sad news for bulls waiting for revival: liquidity push is not enough for a sustained run.
Interest rate cuts, liquidity for banks and incentives for homebuyers among others, are not enough to propel a long-term recovery in the South Asian country's stock market, analysts warn. This will do just fine for the near term, considering very low investor positioning, said Chetan Seth, research analyst at Nomura.
After reports of a deepening crisis, the People's Bank of China slashed banks' reserve requirement ratio and outstanding mortgage rates on Tuesday. The panel decided to cut the seven-day reverse repo rate to 1.5% from 1.7%. On Monday, the central bank lowered its 14-day reverse repurchase rate to 1.85% from 1.95% to boost the economy.
The PBOC panel said it might lower RRR again by 0.25-0.5 percentage points, depending on the liquidity condition, adding that the recent economic impetus will have a neutral effect on banks' margins.
These actions came after the economic print showed a deepening crisis. Government spending declined and youth unemployment shot up.
The rare high-level press conference—arranged only 48 hours earlier—comes after weeks for growing anxiety among top leaders in Xi Jinping's government on the weakening economy, Bloomberg News reported quoting sources.
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Demand-Side Boost Vital For Sustained Bull Run
These 'positive surprises' will trigger a relief rally in Hong Kong and mainland China stocks, at least in the near term and some outperformance, Seth said in the report. Very low investor positioning, modest valuations and multi-month underperformance will aid this short uptick, he said.
"Unless these monetary and liquidity measures are also accompanied by some sort of demand-side measures," it is not clear if this will be enough for a sustained rally, Nomura said.
More fiscal spending, and consumption stimulus, including cash handouts and other measures that aim to instill confidence among consumers, businesses and investors, might bring about a sustained run, it said. "These policies are unlikely to be enough to arrest the worsening economic slowdown and believe that fiscal stimulus should take the front seat."
The CSI 300 extended gains to surge as much as 3.39% on Wednesday, the best intraday gain since Aug. 28, 2023.
The Hang Seng Tech Index, a measure of the 30-largest tech companies listed in Hong Kong, jumped as much as 3.8%. This takes its gains from an August low to more than 20%, according to Bloomberg.
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Relationship With West Not Encouraging
Expectations of a long-term rally are also toned down with the upcoming US presidential elections.
Investors would like to see some tangible improvement in China’s relations with the West, both on the front of geopolitics and trade, Nomura said. "With US presidential elections on the heels, we think market expectations are very low on this front," Seth said.
This might not only affect China, but might send ripples on emerging markets, according to JPMorgan's Jahangir Aziz.
The tariffs that the second administration of Donald Trump may impose on China would hurt emerging countries, especially Indian manufacturers, Aziz said.
China will react by depreciating currency if the 60% tariffs that Trump proposes will come into effect, he said. The products become cheaper in India as currency depreciation in China will take effect, he said. "Every manufacturing exporter will get affected instantly with a seriously more competitive CNY."
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