Beijing’s $114 bln stock market bet rings hollow
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Hudson Lockett
HONG KONG, Sept 25 (Reuters Breakingviews) -China's leaders will be pleased at the immediate reaction to their latest plan to engineer a stock market recovery. The country’s benchmark CSI 300 Index .CSI300 has climbed about 7% since the People’s Bank of China announced a broad package of measures, including rate cuts and stock market support, on Tuesday, taking the gauge into positive territory for the year. But the recovery is likely to fizzle out.
The stock market measures totalling 800 billion yuan ($114 billion) are unprecedented: the central bank will set up a 500 billion yuan swap programme to fund stock purchases by securities, fund and insurance companies, as well as a 300 billion yuan relending facility that banks can use to finance investments by major shareholders and stock buybacks by listed companies.
Morgan Stanley estimates the combined total is equivalent to about 3% of domestic market capitalisation and surpasses the estimated $90 billion of buying so far this year by China’s national team of state-run financial institutions. Central bank governor Pan Gongsheng has floated the possibility of adding a further 500 billion yuan — and more — if necessary.
The plan’s first component, the swap programme, may not get much pickup if institutional investors decide equities are still too risky. But success would bring its own perils: China’s 2015 stock bubble was largely inflated by margin lending, in which brokers allowed retail investors to use shareholdings as collateral to finance further stock buying despite broad economic weakness. The central bank is now effectively encouraging the country’s financial institutions to do this on a grand scale.
One potential beneficiary of the relending facility could be cash-strapped local governments that are heavily invested in local listed companies. In theory, low-cost funding for them to buy more shares, combined with buybacks and dividends, could deliver returns that help local entities meet their most pressing obligations.
But basic arithmetic suggests a limited payoff. Details on how it will work are still lacking, but assume local governments account for the entire 300 billion yuan financing package, are buy-and-hold investors and get a 5% dividend yield a year. That's only 15 billion yuan, which falls to 8.25 billion yuan - $1.2 billion - after subtracting the 2.25% lending rate on the debt. Even if that increases in line with any extra funding, it won't go far.
Both planks rely on lasting share price gains, beyond those already notched up in response to the programme, which has yet to launch. But cheap funding for stock transactions does nothing to address the country's underlying lacklustre growth. Investors have already endured numerous short-lived rallies that crumbled in the face of weak economic fundamentals. Beijing’s latest bet on financial engineering looks like a bad one.
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CONTEXT NEWS
The People’s Bank of China announced on Sept. 24 a package totalling 800 billion yuan ($114 billion) intended to help investors buy shares.
The larger part of the programme is a 500 billion yuan swap programme to fund stock purchases by securities, funds and insurance companies. In addition, the central bank is setting up a 300 billion yuan relending facility intended to guide banks to lend to listed companies and major shareholders to finance stock buybacks and share purchases, respectively.
China's CSI 300 index has risen more than 7% since the announcement on Sept. 24, leaving the benchmark up 0.4% for the year to date.
Graphic: Chinese stocks have had a rough 12 months https://reut.rs/3XWKn0G
Editing by Antony Currie and Ujjaini Dutta
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