China’s central bank opens the door to liquidity to boost the economy

by time news

2024-10-10 03:38:00

Listed companies and insurance companies will be able to draw on a fund of 70 billion dollars to purchase shares on the markets, with the aim of strengthening investments.

The Chinese central bank opened on Thursday 10 October a liquidity provision of 500 billion yuan (64.5 billion euros) from which companies will be able to draw to purchase shares, in the hope of reviving the world’s second largest economy. This measure was announced at the end of September by the governor of the People’s Bank of China, Pan Gongsheng, according to whom “will improve significantly” the ability of companies to access funds to purchase shares.

This “exchange” program will allow this “qualified companies” trade bonds, ETFs (baskets of assets intended to replicate a particular stock index) or even shares that are part of the CSI 300 index of the Shanghai and Shenzhen stock exchanges with “high quality liquid assets” such as treasury bills or CBBs (short-term bonds issued by the central bank), the People’s Bank of China said. “The scope of the first phase of the operation is 500 billion yuan and can be expanded depending on the situation”he added, specifying that the operation would begin on Thursday.

A prolonged debt crisis

Listed companies and insurance companies will be able to exploit this windfall to buy shares, with the aim of strengthening investments and thus reinvigorating the economy. The world’s second largest economy has struggled to restart after the draconian measures it had imposed to fight the Covid-19 pandemic were lifted at the end of 2022. It faces multiple problems, including a prolonged debt crisis in the real estate sector, chronically weak consumption and high youth unemployment.

After scant announcements in recent months without any apparent effect, at the end of September the Chinese authorities presented measures on a scale unprecedented in recent years. The central bank significantly reduced the one-year interest rate at financial institutions, reduced the contribution required for a home loan and also lowered existing mortgage rates. Several Chinese metropolises have also announced the removal of some local restrictions perceived as an obstacle to property purchases, in particular Beijing, Shanghai, Guangzhou and Shenzhen.

“Bazooka Relaunch”

Qualified as “Bazooka Relaunch” According to one analyst, these measures have sent stock markets in Hong Kong and mainland China up by more than 20%. But investors in mainland China and Hong Kong expected more, and were disappointed this week by the lack of announcements at Tuesday’s highly anticipated news conference by Zheng Shanjie, the powerful chairman of the National Development and Reform Commission. The latter simply said yes “fully confident” in the fact that China would reach its official GDP growth target in 2024 (+5%). Chinese stock markets immediately collapsed again, with Shanghai experiencing its worst day in more than four years, losing more than 6%.

Economists say more direct government support will be needed to revive consumption and reach the growth target. In early trading on Thursday, the Shanghai Stock Exchange gained slightly 0.36% and the Shenzhen Stock Exchange lost 1.82%. Hong Kong’s Hang Seng Index jumped 3.86%. Markets will now await the words of Finance Minister Lan Fo’an during the briefing scheduled for Saturday in Beijing. According to the Chinese government, Lan must submit to “Countercyclical adjustment of fiscal policy to promote quality economic development”.

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