China’s latest monetary policy adjustments have sent shockwaves through both its mainland and Hong Kong stock markets, triggering unprecedented surges and record-breaking trading volumes. Following the U.S. Federal Reserve’s half-percent rate cut last week, China has responded by reducing its Reserve Requirement Ratio (RRR), signaling the beginning of a rate-cutting cycle. But what are the implications for China’s economy and its stock markets?

Chinese authorities have introduced a comprehensive suite of measures to stabilize and stimulate the economy in the second half of September 2024. The joint announcement by the People’s Bank of China, the National Financial Regulatory Administration, and the China Securities Regulatory Commission includes lowering the RRR and the 7-day reverse repo rate, reducing existing mortgage rates, and implementing new policy tools to support the stock market. These initiatives are designed to enhance liquidity, reduce borrowing costs, and boost investor confidence, setting the stage for sustained economic growth and a vibrant stock market.

Soaring Stocks and Record Trades

The immediate aftermath of China’s policy announcements was nothing short of explosive. On 30 September 2024, the Shanghai and Shenzhen stock exchanges witnessed a combined transaction volume of 25.9 trillion RMB, shattering the previous 2 trillion mark. The Shanghai Composite Index skyrocketed by 8%, while the Shenzhen Component Index leaped by 11%.

Across the border, Hong Kong’s stock market mirrored this fervor, with transaction volumes surpassing HKD 5,058 billion and the Hang Seng Index climbing past 21,133 points. These figures represent a seismic shift in investor confidence and market dynamics.

Decoding China’s New Monetary Measures

To understand the full impact of China’s stimulus package measures, it’s essential to examine the methods:

RRR Reduction Boosts Liquidity

The People’s Bank of China (PBOC) slashed the Reserve Requirement Ratio (RRR) for financial institutions by 0.5 percentage points, excluding those already operating under a 5% RRR. This bold move releases approximately 1 trillion RMB into the financial markets, significantly enhancing long-term liquidity. Following this adjustment, the weighted average RRR for banks now stands at around 6.6%.

By lowering the RRR, the PBOC effectively frees up excess reserves from banks, increasing their capacity to extend loans. This surge in available funds boosts liquidity and fosters robust credit growth, essential for sustained economic expansion. The substantial influx aims to stimulate key sectors such as technology, real estate, and banking, providing the financial fuel necessary to drive investment and consumer spending.

Lowering 7-Day Reverse Repo Rate

To manage short-term liquidity, the PBOC lowered the 7-day reverse repo rate by 0.2 percentage points to 1.5%. This reduction signals a more accommodative monetary stance, making borrowing cheaper for banks. As a result, banks are encouraged to lend more, further stimulating economic activity and supporting overall growth.

Mortgage Rate Cuts

Existing mortgage holders stand to benefit significantly from the recent rate cuts. With an anticipated average reduction of 0.5 percentage points, approximately 50 million households could see their annual interest expenses decrease by around 150 billion RMB. This not only eases financial burdens on families but also injects more disposable income into the economy.

The Long-Awaited Market Recovery?

Investor sentiment has shifted dramatically over the last week of September. Scott Rubner, Managing Director of Goldman Sachs’ Global Markets Division, notes a growing Fear of Missing Out (FOMO) among investors. He commented that the long-awaited recovery in China’s stock market might finally be underway. Hedge funds rapidly increased their stakes in Chinese equities, contributing to the most significant single-day net buys since March 2021.

Zhao Yaoting from Invesco Asia-Pacific Strategy emphasizes that these measures reflect the government’s proactive stance in addressing economic challenges. “These stimulus measures could propel China’s economic growth back to its 5% target,” Zhao stated, highlighting the critical role of mortgage rate cuts in revitalizing the real estate sector. However, the prolonged holiday starting 1 October could lead to profit-taking and temporary sell-offs in A-share markets. “While the immediate response is strong, we need to monitor how the markets behave during the holiday,” Zhao added.

Conclusion: Optimism with Caution

The recent U.S. interest rate cut, followed by China’s aggressive monetary easing, has created an unprecedented environment for institutions and high-net-worth individuals (HNWIs). China’s reduction of the RRR by 0.5 percentage points and the 7-day reverse repo rate by 0.2 percentage points injects roughly RMB 1 trillion into the financial system, significantly boosting liquidity. This liquidity-driven environment, supported by the People’s Bank of China, promotes growth and innovation in critical technology and real estate sectors. The resulting buoyant stock market could strengthen consumer and business confidence.

This surge in available capital presents immense opportunities for investment diversification and access to cheaper credit. Private banking institutions are poised to expand their offerings from tailored credit lines to structured products. At the same time, equity financing sees increased investor participation, making it easier for companies to raise capital.

However, the flood of liquidity also comes with risks. Inflationary pressures or asset bubbles could emerge without careful management, threatening long-term economic stability. Furthermore, China’s influence on the global stage means its monetary policies will have far-reaching effects. While this new wave of easing offers significant opportunities, cautious navigation is required to avoid potential pitfalls.