State-owned investors save Chinese stocks
Why China must go deeper into debt; Has money supply growth become irrational?
Our round-up of key economic and financial developments in China as of Tuesday, 25 June, 2024:
A “national team” of state-owned investors suspected of rushing into to save the A-share stock market from dropping further.
Yu Yongding believes China needs to issue more treasuries and engage in greater deficit spending to achieve GDP targets.
Interest rates kept on hold in June due to narrowing net interest margins and arbitrage concerns, but cuts could arrive in the third quarter.
Green innovation expected by senior Chinese politician to emerge as key driver of economic growth.
Lian Ping says China’s money supply growth has become “irrational” due to inadequacies of the capital market and excess volume of long-term lending by banks.
Economic powerhouse Jiangsu province launches new investment fund for strategic emerging sectors.
State-owned investors rush in to save Chinese stocks
State-owned financial institutions are suspected of swooping in to prevent Chinese A-shares from plunging further below key psychological thresholds last week, according to a report from 21 Century Business Herald.
On Friday 21 June, China's three major A-share indexes saw pronounced volatility, with the Shanghai Stock Exchange Index falling 0.24%, to dip beneath the 3,000 threshold to 2,998.14. The Shenzhen Component Index fell 0.04%, while the ChiNext Index fell 0.39%.
Total transaction volume throughout the day was only 623.374 billion yuan, a decrease of more than 104 billion yuan from the previous session. It was also the second "driest" trading session this year, only slightly higher than the 618.768 billion yuan transaction volume on January 15.
When the Shanghai Stock Exchange Index fell below the 3000 point threshold, however, many broad-based ETFs such as the CSI 300 ETF, SSE 50, and CSI 500 saw a sizeable rise in trading volumes, in an obvious sign of inrushing funds.
The transaction volume for the CSI 300 ETF reached 6.91 billion yuan, while the transaction volumes for the SSE 50 ETF, CSI 300 ETF and CSI 300 ETF China were all above 2 billion yuan.
Industry insiders believe that a "national team" of investors led by Central Huijin Investment intervened to prop up Chinese stocks, given the marked increase in trading of these ETFs amidst a broader decline in transaction levels.
Central Huijin is a sovereign fund that is a key shareholder in China's top financial institutions, harbouring majority stakes in four of the big six state-owned banks.
Analysts from China Industrial Securities (兴业证券) have previously opined that during periods of high volatility, ETF funds have emerged as key ballast stones for market stabilisation thanks to the participation of what they refer to as "policy capital."
"Policy capital as represented by Central Huijin is a key force for the preservation of market stability.
"If market volatility intensifies again, we can still expect further inflows of policy capital to preserve stability."
China's policymakers also hope that medium and long-term funds will make greater recourse to ETFs to take positions in A-share assets.
China needs to go deeper into debt to hit 5% growth target
A leading Chinese economist says Beijing needs to step up the issuance of treasury bonds if it wants to hit its 5% GDP growth target this year.
Yu Yongding (余永定 ), a member of the Chinese Academy of Social Sciences (CASS) and head of the China Society of World Economics, writes that Chinese infrastructure investment will need to grow by around 11.7% this year in order to achieve a GDP growth target of 5%.
Yu points out that while rapid growth in manufacturing has surpassed expectations since the start of 2024, consumption growth has fallen more than expected, creating a need for more stimulus spending in the form of infrastructure investment.
"In 2024, the central fiscal authorities will perhaps need to further expand bond issuance and increase the fiscal deficit," Yu writes.
"This could be to increase support for infrastructure investment based on growth stabilisation considerations or for the prevention and dissolution of real estate sector risk and local government debt risk."
Yu expects that a rise in deficit spending will be accompanied by accommodating monetary policy from the Chinese central bank.
"Once the government accelerates the pace of treasury sales and expands the scope of debt, I feel it will be difficult to avoid having the central bank expand the vigour of open market operations and making large-scale purchases of treasuries on the secondary market."
Interest rates kept on hold in June, cuts could arrive in third quarter
China's benchmark interest rates have remained unchanged in June. The loan prime rates (LPR) released on 20 June came in at 3.45% for the 1-year LPR and 3.95% for the 5-year LPR, on par with the prints for last month.
The 1-year LPR has been at 3.45% since the start of 2024, while the 5-year LPR has fallen just once, with a 25 basis point cut in February.
Wen Bin (温彬), chief economist with China Minsheng Bank, told state-owned media that there was little room for cuts to the LPR in the near-term, due to the tight net interest margins of the Chinese banking sector and concerns over arbitrage.
"At present, the rates for certain loans are already quite low," Wen said. "If the LPR holds steady, then it can alleviate an excessively rapid decline in loan rates leading to the empty circulation of funds and arbitrage, raising the efficiency of capital movement."
Wang Qing (王青), chief macroeconomic analyst at Golden Credit Ratings, foresees rate cuts in the third quarter, however, as inflation remains tepid and the actual financing costs of the real economy rend high.
"The LPR could follow downward adjustments in the rates for medium-term lending facilities (MLF), and we also cannot exclude the possibility of moves at the regulatory level to drive further declines in the deposit costs of banks, that would push LPR quotes lower" Wang said.
Green innovation will become China's major new growth driver
Liu Shimin (刘世锦), deputy director of the Economic Committee of the 13th CPPCC National Committee, believes that China's green transformation will soon emerge as a key driver of economic growth.
"Green innovation will drive a large volume of green investment, and become one of the most important new drivers of economic growth and investment in innovation now and in the future," Liu said in a speech delivered on 20 June at an event held by the China News Service (CNS).
"In the past when people discussed carbon reduction, some were worried that it would create a drag on economic growth,"
"However, now everyone views it as a mutually-expediting joint-win relationship."
Liu said the Chinese government could play a more effective role in three areas:
Firmly upholding China's twin carbon reduction targets of carbon neutrality by 2030 and zero carbon by 2060, and stabilising expectations for green transformation and long-term growth.
Unveiling quantitative carbon reduction indices for all levels of government when appropriate. Popularising carbon accounts and accounting.
Gathering and promptly releasing information, further standardising the market competition order, and preventing unhealthy forms of competition from warping prices for factors of production.
China's money supply is irrational because banks have too many long-term loans: Lian Ping
A leading Chinese economist says the financial system is hampered by an unusually high percentage of long-term lending by banks, which has led to unreasonable growth in the money supply and low levels of efficiency.
Lian Ping (连平), a professor at East China Normal University writes that the share of medium and long-term loans in the Chinese banking system has seen continuous increase over the past decade.
In 2011, domestic and foreign currency medium and long-term loans accounted for 42.3% of lending by Chinese financial institutions. By July 2022, this figure had risen to 65.9%, while the end of 2023 it had further increased to 70.9%.
Lian imputes this increase to three factors. The first is the rapid expansion in infrastructure investment in the wake of the Global Financial Crisis, with this form of stimulus measure employed more frequently after 2015.
The ongoing growth of China’s real estate market is another factor, with developer loans and mortgages accounting for 24.8% of outstanding bank loans in 2022.
A final factor is inadequate development of equity investment, to cater to the medium and long-term financing needs of the market. As a consequence, banks have been forced to pick up the slack.
According to Lian, this has forced monetary policy to play a greater role in supporting economic growth, leading to unreasonable expansion in the M2 money supply to over 300 trillion yuan by the end of the first quarter of 2024.
In order to deal with the issue, Lian called for accelerating the development of direct financing via the capital market.
“Effectively improving the financial structure is the fundamental means of rationally controlling M2 growth,” he writes.
Jiangsu becomes latest province to launch multi-billion yuan strategic industry fund
The eastern coastal province of Jiangsu has become the latest Chinese locality to launch its own "mother" fund for strategic emerging industries.
The Jiangsu government recently announced the launch of the fund with a total value of around 50 billion yuan.
Domestic observers have highlighted Jiangsu's designation of the fund as a form of "patient capital" (耐心资本) destined for long-term investment in key strategic projects.
Jiangsu currently ranks second amongst China's provinces in terms of economic size, possessing strong infrastructure for new industrial development and a coastal location that favours seaborne trade.