Asian equities surged on Tuesday following China’s central bank’s announcement of new stimulus measures aimed at achieving this year’s economic growth targets and halting a recent decline in the stock market. Hong Kong’s markets experienced the most significant gains, with major indices rising nearly 3%. Meanwhile, mainland Chinese indices saw an increase of over 1%, bolstered by discussions of establishing a stock stabilization fund. The MSCI Asia Pacific Index increased by 0.5%, while Japanese stocks also gained ground after reopening from a holiday. Notably, the yield on China’s 10-year government bonds dropped to a record low of 2%.
China is set to introduce at least 500 billion yuan (approximately $71 billion) in liquidity support for the stock market, allowing brokerages and investment funds to access the central bank’s funds to purchase equities. This initiative follows a steep decline in the benchmark CSI 300 Index, which recently hit its lowest point in over five years. The measures are part of a broader strategy to revitalize the economy, which includes lowering a key short-term interest rate and reducing borrowing costs for approximately $5.3 trillion in mortgages.
Despite the positive initial market response to these stimulus efforts, analysts caution that the rally may not be sustainable, given the persistent underlying issues affecting China’s economy, such as deflationary pressures.
Siguo Chen, a portfolio manager at RBC BlueBay Asset Management, remarked, “These measures clearly indicate that Beijing now recognizes the urgency of enhancing sentiment in both the stock and housing markets. In the short term, they may help stabilize the market, but long-term recovery will likely require additional fiscal support.”
The People’s Bank of China plans to establish a swap facility that would enable securities firms, investment funds, and insurance companies to obtain liquidity for stock purchases, as detailed by the central bank’s governor during a Tuesday briefing.
Zhou Nan, founder and investment director at Shenzhen Long Hui Fund Management Co., commented on the new measures: “While they may temporarily boost liquidity and market confidence, they cannot fundamentally alter market trends. There is a significant likelihood that the market may need to decline further before hitting its lowest point.”
In the U.S., stock futures dipped slightly after the S&P 500 index closed up by 0.3% in the previous session, nearing last week’s all-time high. Recent data indicated that U.S. business activity grew at a slower pace in early September, with deteriorating expectations and a measure of prices received reaching a six-month high, bolstering confidence in the U.S. economy’s potential to achieve a soft landing. Investors are now anticipating upcoming reports on the Federal Reserve’s preferred inflation metric and U.S. consumer spending later this week.
In Asian trading, the yield on the two-year Treasury, which is sensitive to policy changes, declined by one basis point to 3.58%, while yields on longer-term Treasuries remained relatively stable. Market participants are betting on nearly three-quarters of a percentage point in rate cuts by the end of the year, suggesting that another significant reduction in interest rates is likely.
Chicago Federal Reserve President Austan Goolsbee stated that as inflation nears the central bank’s target, the focus should shift to labor market dynamics, which may lead to multiple rate cuts over the next year. Minneapolis Fed President Neel Kashkari supported a half-percentage point reduction in interest rates by year-end, citing job market weaknesses. In contrast, Atlanta Fed President Raphael Bostic adopted a more cautious stance, advocating for a gradual approach to cutting rates to avoid committing to large reductions too hastily.
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