Major Financial Policies Support Consumption, Real Estate, and Stock Market Stability

Abstract

During the week of September 16th to 20th, the First Financial Research Institute's China Financial Conditions Daily Index had an average value of -1.72, marking an increase of 0.13 from the previous week and a decrease of 0.48 for the year. Analyzing the components of the index, the tightening of liquidity last week was the primary driver of the index's rise. In terms of monetary indicators, the interbank market experienced a tight liquidity condition, with a significant increase in major money market interest rates. For bond indicators, the yield on bonds with high liquidity and high credit ratings continued to decline. Regarding stock market indicators, the price-to-earnings ratio and trading volume of A-shares remained at historical lows.

Last week, affected by the Mid-Autumn Festival holiday, the overall market liquidity noticeably tightened. Major money market interest rates rose significantly, with the average rates for overnight repurchase agreements (R001 and DR001) being 1.97% and 1.87% respectively, increasing by 15.96 basis points (bp) and 10.54 bp compared to the previous week. For the 7-day repurchase rates (R007 and DR007), the averages were 2.02% and 1.94%, increasing by 13.51 bp and 13.97 bp respectively. Despite the overall tightening of market liquidity, there was no significant liquidity stratification between banks and non-bank financial institutions, with the spread between R007 and DR007 rates remaining below 10 bp. The central bank injected a large amount of short-term funds to alleviate the tight liquidity situation. The central bank conducted a total of 1.6637 trillion yuan in 7-day reverse repo operations last week, with an average daily injection exceeding 500 billion yuan. On September 24th, Central Bank Governor Pan Gongsheng, Director of the Financial Regulatory总局 Li Yunze, and China Securities Regulatory Commission Chairman Wu Qing attended a press conference held by the State Council Information Office, introducing the financial support for high-quality economic development. Several significant financial policies were announced at the meeting, including a 0.5 percentage point reduction in the reserve requirement ratio, a 20 basis point interest rate cut, the creation of stock repurchase and increase in re-lending, reduction in existing mortgage loan rates, and the unification of the minimum down payment ratio for mortgages, all of which are conducive to supporting the stable development of consumer spending, real estate, and the stock market.

During the week of September 16th to 20th, both the issuance and net financing of the bond market significantly decreased compared to the previous week. The fact that there were only three trading days last week was an important factor leading to the decline in bond financing scale. The total bond market issuance was 1.31 trillion yuan, a decrease of 607.899 billion yuan from the previous week; the net financing was -223.332 billion yuan, a decrease of 746.22 billion yuan from the previous week. Looking at the secondary market, the yields on government bonds of various maturities continued their downward trend from before, especially the long-end government bond yields, which saw significant decreases. The yields on 10-year, 20-year, and 30-year government bonds decreased by 4.89 bp, 6.31 bp, and 7.3 bp respectively. For credit bonds, the yields on AAA-rated credit bonds with higher liquidity and better credit performance continued to decline, while the yields on AA-rated credit bonds showed a fluctuating trend.

During the week of September 16th to 20th, the total financing amount of A-shares was 6.77 billion yuan, a decrease of 1.829 billion yuan from the previous week. Looking at the year to date, the cumulative financing of A-shares this year was 227.268 billion yuan, weaker than the same period in previous years. In terms of the secondary market, all major A-share indices rose, with the Shanghai Composite Index up by 1.2%, the SME Index up by 0.6%, and the ChiNext Index up by 0.1%. The average daily trading volume of A-shares was 561.2 billion yuan, and the price-to-earnings ratio was 12.7, both at historical low levels.

Main Text

I. Overview of China's Financial Conditions Index

Analyzing the components of the index, the tightening of liquidity last week was the primary driver of the index's rise. In terms of monetary indicators, the interbank market experienced a tight liquidity condition, with a significant increase in major money market interest rates. For bond indicators, the yield on bonds with high liquidity and high credit ratings continued to decline. Regarding stock market indicators, the price-to-earnings ratio and trading volume of A-shares remained at historical lows.

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II. Money MarketLast week, influenced by the Mid-Autumn Festival holiday, the overall market liquidity noticeably tightened. The main money market interest rates saw a significant rise. In terms of overnight repurchase rates, the average rates for R001 and DR001 last week were 1.97% and 1.87%, respectively, increasing by 15.96 basis points (bp) and 10.54 bp compared to the previous week. For the 7-day repurchase rates, the average rates for R007 and DR007 last week were 2.02% and 1.94%, respectively, increasing by 13.51 bp and 13.97 bp compared to the previous week. Although the overall market liquidity tightened, there was no significant liquidity stratification between banks and non-bank financial institutions, with the rate difference between R007 and DR007 remaining below 10 bp.

The central bank released a large amount of short-term funds to alleviate the tension in the money market. Last week, the central bank injected a total of 1.6637 trillion yuan in 7-day reverse repurchase agreements, with an average daily injection exceeding 500 billion yuan.

On September 24th, Central Bank Governor Pan Gongsheng, Director General Li Yunze of the Financial Regulatory General Bureau, and China Securities Regulatory Commission (CSRC) Chairman Wu Qing attended a press conference held by the State Council Information Office, introducing the financial support for high-quality economic development. At the meeting, several major financial policies were introduced, including a 0.5 percentage point reduction in the reserve requirement ratio, a 20 bp interest rate cut, the creation of stock repurchase and increase in re-lending, reduction in existing mortgage loan rates, and unification of the minimum down payment ratio for mortgages, all of which are conducive to supporting the stable development of consumer spending, real estate, and the stock market.

1. Money Market Transaction Volume and Interest Rates

From September 16th to 20th, affected by the Mid-Autumn Festival holiday, the overall market liquidity noticeably tightened. Last week, the average transaction volume of the interbank market's pledged repurchase was 6.34 trillion yuan, an increase of 630 billion yuan compared to the previous week's average.

The main money market interest rates significantly increased. In the overnight repurchase rates, the average rates for R001 and DR001 last week were 1.97% and 1.87%, respectively, increasing by 15.96 bp and 10.54 bp compared to the previous week. In the 7-day repurchase rates, the average rates for R007 and DR007 last week were 2.02% and 1.94%, respectively, increasing by 13.51 bp and 13.97 bp compared to the previous week.

The difference between R007 and DR007 last week increased from 5.54 bp to 9.58 bp, but it remained below 10 bp, indicating that although the overall market liquidity tightened, there was no significant liquidity stratification between banks and non-bank financial institutions.

2. Central Bank's Open Market Operations

The central bank continued to inject a large amount of short-term funds to alleviate the tension in the money market. From September 16th to 20th, the central bank's daily injection of 7-day reverse repurchase reached 500 billion yuan, with a total injection of 1.6637 trillion yuan for the week. There were 884.5 billion yuan of reverse repurchase maturities, resulting in a net injection of funds by the central bank of 779.2 billion yuan.

On the morning of September 24th, Central Bank Governor Pan Gongsheng, Director General Li Yunze of the Financial Regulatory Bureau, and CSRC Chairman Wu Qing attended a press conference to introduce the financial support for high-quality economic development. At the meeting, several major financial policies were introduced:1) The central bank has reduced the reserve requirement ratio by 0.5 percentage points, releasing long-term funds of 1 trillion yuan. Concurrently, the central bank has lowered interest rates by 20 basis points, reducing the 7-day reverse repo rate from 1.7% to 1.5%. This move is expected to lead to a decrease in deposit rates and LPR rates, with an estimated reduction of 20 to 25 basis points.

2) The central bank has lowered the interest rates on existing housing loans and unified the minimum down payment ratios for housing loans. Commercial banks are guided to reduce the interest rates on existing housing loans to a level close to that of newly issued loans, with an expected average reduction of around 0.5 percentage points. The minimum down payment ratios for first and second homes have been unified, with the national minimum down payment ratio for second-home loans being reduced from the current 25% to 15%.

3) The 300 billion yuan in affordable housing re-lending created by the People's Bank of China in May will see the central bank's funding support ratio increased from the original 60% to 100%, enhancing market incentives for banks and acquiring entities. The operational property loans and the "Financial 16 Articles" policy documents, both due to expire by the end of the year, will be extended to the end of 2026. Building on the use of some local government special bonds for land reserves, studies are being conducted to allow policy banks and commercial banks to loan support to qualified enterprises for the market-oriented acquisition of real estate company land, activating existing land use and alleviating the financial pressure on real estate companies.

4) A swap facility for securities, funds, and insurance companies has been established. Qualified securities, funds, and insurance companies can use their holdings of bonds, stock ETFs, and constituent stocks of the CSI 300 as collateral to exchange for high-liquidity assets such as government bonds and central bank bills from the central bank. The initial operation scale of the swap facility is 500 billion yuan, with the possibility of expanding the scale in the future depending on the situation.

5) A re-lending facility for stock buybacks and increases has been created. Commercial banks are guided to provide loans to listed companies and major shareholders for the repurchase and increase of listed company stocks. The central bank will issue re-lending to commercial banks, providing 100% funding support, with a re-lending rate of 1.75%. The loan rate that commercial banks issue to customers is around 2.25%, with an initial quota of 300 billion yuan.

III. Bond Market

Looking at the secondary market, the yields of government bonds of various maturities continued the previous downward trend last week, especially the long-end government bond yields, which saw a significant decrease. The yields of 10-year, 20-year, and 30-year government bonds decreased by 4.89 basis points, 6.31 basis points, and 7.3 basis points, respectively. Regarding credit bonds, the yields of AAA-rated credit bonds with higher liquidity and better credit performance continued to decline, while the yields of AA-rated credit bonds showed a fluctuating trend.

1. Bond Market Issuance

From September 16th to 20th, both the issuance and net financing of the bond market significantly decreased compared to the previous week. The fact that there were only three trading days last week is an important factor leading to the decline in bond financing scale. Among them, the total issuance of the bond market was 1.31 trillion yuan, a decrease of 607.899 billion yuan from the previous week; the net financing of the bond market was -223.332 billion yuan, a decrease of 746.22 billion yuan from the previous week.From the perspective of government departments, last week's issuance of national debt and local debt was stable, with a net financing of 260.57 billion yuan for national debt. Local governments' general debt and special purpose debt achieved net financing of 24.928 billion yuan and 128.337 billion yuan, respectively, with the entire government sector achieving net financing of 413.834 billion yuan. Looking at the financial sector, last week saw a net repayment of 485.28 billion yuan in interbank certificates of deposit, a net financing of 47 billion yuan in policy bank bonds, and a net repayment of 7.1 billion yuan in commercial bank subordinated bonds, resulting in a net repayment of 537.94 billion yuan for the entire financial sector in bonds. Regarding the non-financial corporate sector, last week's corporate bonds, medium-term notes, short-term financing, and directed tools saw net repayments of 8.658 billion yuan, 9.82 billion yuan, 75.577 billion yuan, and 15.382 billion yuan, respectively. Corporate bonds and asset-backed securities achieved net financing of 1.314 billion yuan and 8.897 billion yuan, respectively, with the entire non-financial corporate sector experiencing a net repayment of 99.226 billion yuan in bonds.

Compared to the same period last year, the overall net financing scale of the bond market has expanded significantly this year. As of September 22, the year-on-year growth rate of the bond balance in the government sector was 16.4%, an increase of 4.5 percentage points compared to the same period in 2023; the year-on-year growth rate of the bond balance in the financial sector was 12.1%, an increase of 5.1 percentage points compared to the same period in 2023; the year-on-year growth rate of the bond balance in the non-financial corporate sector was 4.3%, an increase of 5.2 percentage points compared to the same period in 2023.

2. Bond Yield Trends

1) Interest Rate Bonds

From September 16th to 22nd, the yield on government bonds of all maturities continued the previous downward trend, especially for long-term government bond yields which saw a significant decline. Looking at the medium to long end, the yields on 5-year, 10-year, 20-year, and 30-year government bonds decreased by 1 basis point (bp), 4.89 bps, 6.31 bps, and 7.3 bps, respectively. For the short end, the yields on 1-month, 3-month, and 6-month government bonds decreased by 0.27 bps, 1.51 bps, and 0.38 bps, respectively.

Regarding the term spread of government bonds, from September 16th to 20th, the term spread of government bonds slightly receded, mainly due to the recent rapid decline in long-term government bond yields. In the week ending on September 20th, the average yield spread between the 10-year government bond and the 1-year government bond was 65.21 bps, a decrease of 5.87 bps from the previous week. Looking at the year, the term spread of government bonds still showed a fluctuating trend, with the spread between the 10-year and 1-year government bonds increasing by 17.64 bps as of September 20th compared to the beginning of the year.

2) Credit Bonds

From September 16th to 20th, the yields on most types of credit bonds decreased, with the more liquid AAA-rated credit bonds seeing a more significant decrease in yields. Among AAA-rated bonds, the yields on 5-year corporate bonds, corporate bonds, and asset-backed securities decreased by 2.25 bps, 2.53 bps, and 2.34 bps, respectively. Among AA-rated bonds, the yields on 5-year corporate bonds and corporate bonds increased by 0.45 bps and 0.06 bps, respectively, while the yield on 5-year asset-backed securities decreased by 2.12 bps.

Looking at the credit spread, the spread between AAA-rated credit bonds and government bonds continued to narrow, while the spread between AA-rated credit bonds and government bonds showed a fluctuating trend. Among AAA-rated bonds, the spreads between corporate bonds, corporate bonds, and asset-backed securities and government bonds decreased by 1.27 bps, 1.55 bps, and 1.36 bps, respectively, last week. Among AA-rated bonds, the spreads between corporate bonds, corporate bonds, and government bonds increased by 1.43 bps and 1.04 bps, respectively, last week, while the spread between asset-backed securities and government bonds decreased by 1.14 bps.

IV. Stock MarketDuring the week of September 16th to 20th, the total financing amount in the A-share market was 6.77 billion yuan, a decrease of 18.29 billion yuan compared to the previous week. Looking at the year-to-date figures, the cumulative financing in the A-share market this year reached 227.268 billion yuan, which is weaker than the same period in previous years.

From the perspective of the secondary market, all major A-share indices rose, with the Shanghai Composite Index increasing by 1.2%, the SME Index by 0.6%, and the ChiNext Index by 0.1%. The market's risk preference, measured by the year-on-year growth rate of stock indices minus the yield of 10-year government bonds, showed a fluctuating trend.

In terms of trading volume, the average daily trading volume of A-shares last week was 561.2 billion yuan, an increase of 8.3% compared to the previous week. Regarding the price-to-earnings ratio, the weighted average P/E ratio of A-shares last week was 12.7, a decrease of 0.4% from the previous week. Both the trading volume and P/E ratio of A-shares are in a historically low range. Recently, the difference between A-share financing and securities lending has decreased to 1.35 trillion yuan, accounting for 2% of the total market value of A-shares.

1. Primary Market

During the week of September 16th to 20th, the total financing amount in the A-share market was 6.77 billion yuan, a decrease of 18.29 billion yuan compared to the previous week. Looking at the 4-week rolling average data of A-share financing, since the fourth quarter of last year, A-share financing has been at a relatively low level. Year-to-date, the cumulative financing in the A-share market this year reached 227.268 billion yuan, which is weaker than the same period in previous years.

2. Secondary Market

During the week of September 16th to 20th, all major A-share indices increased, with the Shanghai Composite Index rising by 1.2%, the SME Index by 0.6%, and the ChiNext Index by 0.1%. The market's risk preference, as measured by the year-on-year growth rate of stock indices minus the yield of 10-year government bonds, exhibited a fluctuating pattern.

Regarding trading volume, the average daily trading volume of A-shares last week was 561.2 billion yuan, an increase of 8.3% compared to the previous week. In terms of the price-to-earnings ratio, the weighted average P/E ratio of A-shares last week was 12.7, a decrease of 0.4% from the previous week. Both the trading volume and P/E ratio of A-shares are within a historically low range. Recently, the gap between A-share financing and securities lending has decreased to 1.35 trillion yuan, representing 2% of the total market value of A-shares.