Chinese equity markets rally on official support

KEY DEVELOPMENTS

Chinese equity markets rallied on expectations that Beijing's new stimulus initiatives would bolster the economy – the government plans to issue one trillion yuan in special bonds to fund disaster relief and infrastructure improvements – and indications that Central Huijin Investment, a Chinese state fund, had bought local exchange-traded funds (ETFs).

Last week, the Shanghai Composite Index rallied above the 3,000 level, up close to 2%. At the same time, the retail-oriented Shenzhen Composite Index rose 3.0%. On Monday, the Shanghai Composite Index extended gain by 0.12%, while the Shenzhen Composite Index surged by 1.61% from the previous close. Last week, the offshore Chinese yuan hit a new low of $/CNH 7.3324.

Economic indicators signaled a potential stabilization in China, with industrial firms extending profit gains in September, according to Friday's National Bureau of Statistics (NBS) data. Profits rose 11.9% in September after a surprising 17.2% spike in August, year-on-year. This financial uptick hints at the effectiveness of recent supportive policies deployed by the Chinese authorities.

GLOBAL IMPACT

An economic stimulus package is due to support the domestic economy, with the hope that local investors The yuan continues to struggle, but its decline is slowing and appears to be managed.

MARKETS

will buy stocks. CNY1 trillion in government bond issues was confirmed, potentially diverting Chinese investment away from US treasuries.

• Chinese stock markets rallied last week, with the Shenzhen and Shanghai exchanges up 1.8% and 3.0%, respectively.
• The offshore yuan traded in the $/CNH 7.31 – 7.33 range, ending unchanged at $/CNH 7.3324.

MAJOR NEWS

China’s budget deficit to boost demand

• China's 2024 budget deficit-to-GDP ratio will exceed the critical 3% threshold following the release of CNY1 trillion in government bonds, raising this year's deficit ratio to 3.8% from an initial 3.0% projected in March.
• This extra borrowing aims to support weak domestic demand and secure consistent growth into 2024, and the government anticipates maintaining a substantial fiscal deficit for a few years.
• Investment spending rose 18.7% year-on-year, or $95.96 billion U.S. dollars, the Chinese Ministry of Commerce reported.
• However, China's non-financial direct foreign investment slowed markedly in the year's second half.

China's leadership meets to discuss further economic stimulus

• The country’s top leaders, financial regulators, and banks gathered in Beijing to have a two-day close-door financial work conference starting  today
• This event is held once every five years, and this time, the market anticipated more measures to offer to better contain financial risks tied to properties and deep local government debt
• The market was speculating further monetary easing policies, as those could collaborate with the fiscal stimulus to ease burden on massive government debt

Local bond issues confirmed

• China will issue one trillion yuan in sovereign bonds (approximately $137 billion), the first budget amendment outside its regular legislative session in over a decade.
• These bonds will support infrastructure developments following major natural disasters and mark a move towards central government rather than local government responsibility.
• The last out-of-session budget alteration occurred in 2008 during the Sichuan earthquake recovery, where a varied pool of resources funded a 1 trillion yuan spending plan.
• A four trillion yuan ( $586 billion) stimulus package was introduced last year to strengthen domestic demand amidst the global recession.

Chinese investment fund buys local stocks

• China's sovereign fund, Central Huijin Investment, invested around 10 billion yuan ($1.4 billion) in technology-focused ETFs.
• Huijin's previous $65 million investment in significant bank shares was considered ineffective.
• However, Huijin's previous 2013 and 2015 ETF acquisitions prompted 20% gains in Shanghai stock indices within three months.

China’s central bank governor sends reassurance

• China’s central bank governor issued a financial report, reassuring the markets that Chinese authorities will take measures to stabilize economic momentum.
• The statement was cautious, emphasizing that macro policies will be "precise and forceful.”
• Some economists believe cutting lending rates by as much as 30-40 basis points from the current level will be necessary to accelerate property sales.
• China only cut the 5-year LPR benchmark lending rate used by house buyers by ten bps, highlighting the delicate balance between promoting local issues and maintaining currency stability.

Europe’s gateway to China

• European Commission President Ursula von der Leyen is committed to challenging China’s global infrastructure drive – the EU hosted its inaugural Global Gateway forum in Beijing, positioned as an alternative to China’s Belt and Road Initiative.
• Heads of state and prime ministers were expected from many countries in Europe, Africa, and the Middle East. Still, representatives from BRICS nations like Brazil, India, and South Africa opted out of the event.
• The forum's agenda covered critical raw materials, strategies for green and digital transitions, and the development of international transport corridors: boosting demand for raw materials like steel and rare earth metals, decreasing reliance on fossil fuels, increasing demand for renewable energy components; and, reshaping supply chains and global trade patterns.

Foxconn under investigation

• Foxconn, Taiwan’s leading company and Apple’s main supplier was reported to be under Chinese authorities’ investigation on tax and land uses.
• Although Chinese authorities claimed that all the operations were normal and did not target Foxconn, foreign media widely reported this incident and related it to the company’s founder, Terry Gou, who is currently running for office in Taiwan’s 2024 regional leader election.
• Market observers view his election as troubling Chinese authorities and the pressure on Foxconn as a political act.

US/China talks preparing for Presidential summit

• US and Chinese officials convened and held "in-depth, frank, and constructive" talks, considered part of the preliminaries leading to an anticipated Biden – Xi summit in San Francisco.
• This high-level engagement aims to prevent their strategic rivalry from escalating into conflict, underscoring the intricate balance in US-China relations and good news for calming down the global issues in the Middle East and the Black Sea.

Li Keqiang’s passing

• China's former Premier, Li Keqiang, passed away unexpectedly last week, concluding a decade-long tenure marked by his progressively reformist influence.
• Li advocated robustly for a private economy, encouraged foreign investment, and streamlined government procedures.