China market support may fizzle out if key issues remain unsolved
Subscribe to enjoy similar stories. China’s over $100 billion push to bolster its stock markets has stirred optimism, but begs the question of whether investors and businesses will take the bait amid lingering doubts about the economy’s underlying weakness.
In an unprecedented move, the People’s Bank of China vowed to invest 800 billion yuan of liquidity, equivalent to $113.77 billion, into Chinese stock markets through new swap and loan facilities, a move cautiously welcomed by analysts. While the measures are an “absolute positive," the key will be in the implementation, Morgan Stanley analyst Laura Wang said in a note.
Under the liquidity facility, 500 billion yuan will be available in the first phase for funds, brokers and insurers to buy Chinese stocks, while an additional 300 billion yuan will go toward financing share buybacks by publicly listed companies. Analysts say some challenges that are likely to arise during implementation include the ability and willingness of investors to take risks, and the gestation period it takes for the support to positively affect economic data points, which will signal whether the Chinese economy’s fundamental challenges have been addressed.
Institutional investors’ “incentives to use PBOC facility to build up leverage remains constrained by the availability of attractive investment options," Citi analysts said in a note, adding that the investment risk and repayment of debt taken from the facilities would ultimately rest with the borrower. The size of the fund itself could be another challenge.
Some say the fund, in this first phase, isn’t big enough to be meaningful. CreditSights said in a note that the liquidity facility announced by the central bank in the first phase accounts
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