China stock market information display. (Photographer: Qilai Shen/Bloomberg)

China Adds to Stimulus Drip-Feed as Markets Stumble Again

(Bloomberg) -- China is responding to the slump in its stock markets and the slowdown in the economy with a trickle of stimulus to stabilize, rather than rejuvenate, investor sentiment.

The central bank plans to give 10 billion yuan ($1.4 billion) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, Bloomberg reported Tuesday. Along with new tools to boost lending to companies, and a deadline for the reduction of barriers to foreign investment, the measures add to steps already taken to secure funding and investment for the economy.

In response, Chinese stocks continued Tuesday’s more than 2 percent slide in early trading Wednesday, signaling that investor worries over the economy haven’t been eased by the policy announcements.

As the trade confrontation with the U.S. hardens into a lasting dampener on the economy, investors have taken an ever-gloomier view on the chances of improvement, making domestic stocks the world’s worst performers this year. Analysts are assuming now that the government will keep adding monetary and fiscal stimulus in limited amounts until sentiment improves, as it is unwilling to renege completely on its goal of reducing dependence on debt.

“While each of the loosening measures announced recently may only contribute modestly to the overall economy, they are building momentum and changing people’s perceptions about the policy stance,” economists including Song Yu at Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s mainland joint-venture partner, wrote in a note. “We expect further loosening measures in the coming days and weeks until the economy and markets show clear evidence of an apparent stabilization.”

Multi-Pronged Support Measures So Far

China Adds to Stimulus Drip-Feed as Markets Stumble Again

The impact of President Xi Jinping’s “critical battle” to reduce the economy’s reliance on debt is still rippling through the economy, even as its ferocity has been reduced in recent months. A clamp-down on so-called shadow banking -- a favored financing route for the private sector -- has contributed to a liquidity squeeze that’s worsening as the economy slows.

The outstanding volume of shadow financing shrank for a seventh straight month in September. Borrowing from pledged shares also declined for seven consecutive months through August, according to Moody’s Investors Service. In turn, tougher conditions have led to a record amount of defaults, with non-state firms accounting for 94 percent of local note missed payments this year, data compiled by Bloomberg show.

Read More on China’s Policy Support for the Economy

As China’s mighty state-owned enterprises have traditionally enjoyed better access to funding than their private counterparts -- who nevertheless represent 80 percent of the employment -- measures announced in recent days are aimed at making good on Xi’s pledge of “unwavering” support for non-state companies.

As part of that commitment, China’s central bank plans to give 10 billion yuan ($1.4 billion) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation.

What Our Economists Say...
The plans so far are somewhat vague, making it difficult to put a number on the size of the stimulus. That may be by design. In the current phase, China is identifying the instruments it will use. The size of stimulus will depend on what’s needed to keep growth on target.

-- Tom Orlik and Chang Shu, Bloomberg Economics

Companies that guarantee bonds sold in China are able to provide assurances of up to 10 times their current net assets, or 15 times for guarantee companies that mainly serve small and rural borrowers, according to a 2017 rule from the State Council.

The central bank’s credit support will be "conditional," targeting competitive private companies with a good outlook, not all private companies, analysts led by Chen Jianheng from China International Capital Corporation wrote in a report published Tuesday. The policy "directly targets the problem in financial markets" and it tries to raise risk appetites, but the effects remain unclear for now and that will depend on the implementation, the report said.

The PBOC has cut the amount of reserves that it requires banks to hold four times so far this year, a move that officials have hinted can happen again. Such a step has the benefit of adding funding to the economy without using an across-the-board rate cut, something that would add downward pressure on the currency.

On the fiscal side, the government released a detailed draft plan for previously-announced personal income tax cuts on Saturday. The upshot of those reductions, according to Deutsche Bank AG, could be worth as much as 600 billion yuan and an extra 1 percent for retail sales, if people spend most of the windfall on consumption.

Consumption Windfall

Those income tax cuts are the start of a series of reductions, according to a note by Deutsche Bank economists Zhiwei Zhang and Yi Xiong, an expectation confirmed by the state council’s Monday night announcement.

“Specific measures” to reduce corporate tax burdens and reduce social security rates are currently being studied, according to the State Council announcement. The government also inched forward plans to open its economy to foster foreign investment, an area which has been central to the grievances at the root of the trade war with the U.S.

The government will simplify the rules on foreign investment in China, making the “negative list” the only standard for deciding where foreigners can invest from the end of next March.

GDP growth is expected to slow to 6.6 percent this year and 6.3 percent in 2019. Those predictions don’t factor in Trump’s most recent threats to blanket all imports from China with new duties, which would slice about 1.3 percentage point off those numbers, according to Morgan Stanley.

“The country faces headwinds emanating from a wide range of geopolitical concerns, most of which are beyond the government’s ability to influence,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd.

©2018 Bloomberg L.P.