Chinese Stocks Cool Down As Investors Check Reality

Of the 25 economists, 17 lowered their outlooks while nine maintained their forecasts. Nikkei said the average estimate for China's year-on-year GDP growth for the third quarter of this year was 4.6%, compared with 4.9% in the same period of last year.

The PBoC on September 24 announced its plans to lower borrowing costs and allow banks to increase lending.

It initially cut Chinese banks' reserve requirement ratios by 50 basis points so that banks could provide an additional 1 trillion yuan (US$143 billion) of loans to borrowers. It also reduced the 14-day reverse repo rate by 10 basis points to 1.85%.

The central government unveiled a series of fiscal measures to stimulate the demand side of the economy. It also called on local governments to relax their property rules to stop home prices from falling.

“The announced easing in purchase restrictions for second homes demonstrates some willingness to expand pockets of residential real estate investment,” economists at PGIM, formerly known as Prudential Investment Management, say in a research report.

“However, the intent is unlikely to revive real estate to the point where it drives a domestic wealth effect,” they say.“Rather it is likely aimed at clearing the market from excess inventory in an effort to stop property prices from declining further.

PGIM economists expect that the government's monetary easing and newly-announced fiscal measures, which include unemployment benefits and some child benefit support and pension reform initiatives, may help China reach its 5% growth target over the next year.

They say that prior to last week's announcements, China was growing at about 3% annually, which is solidly below authorities' stated annual growth target of 5%.

“Despite
the
current
surge
in
market
optimism,
the
lasting
effects
will need additional policy supports and take time to manifest,” Alicia Garcia Herrero, chief economist in Asia Pacific region, Natixis CIB Research, says in a research report.
“The real test lies in whether the economic fundamentals can follow suit.”

“China's economy is currently dealing with major issues such as persistently low inflation, weak real estate prices, and declining credit demand,” she says.“Only once we see real improvements in these areas will market confidence be fully restored.”

Some observers said the PBoC's rate cuts may squeeze Chinese banks' margins and create asset bubbles.

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”We expect bank net interest margins (NIMs) to remain under pressure in the second half of this year and the full year of 2025, partly due to rate cuts for existing mortgages,” says Duncan Innes-Ker, senior director of Fitch Wire at Fitch Ratings.“Rate cuts will be positive for asset quality, but we still expect rated banks' impaired loans to rise moderately in 2025 as growth slows.”

Besides, he says Fitch's calculations show that outstanding bonds issued by local government financing vehicles (LGFVs) increased by 3.1% year-on-year in June 2024.

“We expect LGFV debt to continue to grow in 2024, albeit at a slower pace than the 8.8% increase in 2024,” he adds.

“The PBoC's latest rate cut is a big move to try to boost the Chinese economy but it needs more time to see whether such an easing will work,” a Beijing-based writer says in an article.“Policy makers should take decisive measures to prevent an economic hard-landing but at the same time focus on economic reform to achieve stable long-term growth.”

He says the government should be aware that rate cuts may create asset bubbles and increase systemic financial risks while not necessarily pushing up corporate investment.

Read: China unleashes welcome wave of market-friendly stimulus

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