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• 2024-06-22

Fiscal Policy Signals: Impact on A-Shares

Following the introduction of the "9·24" comprehensive financial policy package, the market-anticipated fiscal incremental policy has gradually become clear.

At the press conference held by the State Council Information Office on October 12, Finance Minister Lan Fo'an stated that a series of targeted incremental policy measures will be rolled out in the near future. These mainly include: increasing support for local governments to resolve government debt risks; issuing special treasury bonds to support large state-owned commercial banks in replenishing their core tier-one capital; supporting and promoting the real estate market to stop falling and stabilize; and increasing support and protection for key groups.

"'Debt resolution' and 'ensuring people's livelihoods' are the two key phrases of this meeting," said Huang Wentao, Chief Economist and Co-Head of Research and Development Department at CITIC Securities. He believes that the content and wording of the meeting conveyed a very positive policy orientation, focusing on reducing the burden on localities and providing a safety net for people's livelihoods, accelerating the removal of hard constraints on local governments due to debt and real estate issues, and opening up space for subsequent expansionary policy deployments.

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Lan Fo'an also stated that counter-cyclical adjustments are not limited to the above four points, and other policy tools are also under study. In this regard, CICC believes that the central finance still has room for debt issuance and deficit expansion, and it is expected that the central finance may dynamically consider the economic situation in the future, with the hope of further efforts or the formulation of incremental measures.

Regarding the "suspense" of the scale of this round of incremental policies, the National People's Congress Standing Committee meeting to be held in late October is an important node. Huang Runan, Co-Chief Macro Analyst at Guotai Junan, believes that the next step needs to focus on whether the Standing Committee meeting at the end of October will increase the local debt limit for debt resolution, the expressions of the fiscal scale and expenditure direction at the Political Bureau meeting and the Central Economic Work Conference in December, and the determination of the deficit ratio and the issuance scale of long-term special treasury bonds in the government work report of the Two Sessions in 2025.

So, what is the impact of this fiscal "new policy" on the market? "With the policy efforts superimposed on the improvement of expectations, we believe that the market is expected to regain confidence after the adjustment, and the market may stop falling and stabilize, but the upward slope may slow down compared to the previous period. In the future, focus on the specific implementation of the fiscal plan at the Standing Committee meeting that may be held this month," said CICC.

Debt resolution, real estate, and other stimulus policies are on the way.

At the press conference, the Ministry of Finance elaborated on the four aspects of incremental policy measures that will be rolled out in the near future. Among the four incremental policies, the market's attention to local government debt resolution is relatively high.

Lan Fo'an stated that it is planned to increase the debt limit on a one-time basis to replace the existing implicit debt of local governments on a large scale, and to increase support for local governments to resolve debt risks. Relevant policies will be explained in detail to the public after going through the legal procedures.

Huang Wentao believes that this meeting marks a new stage in local government debt resolution. By raising the debt limit and allowing local governments to issue new bonds to replace the original implicit debt, the short-term debt repayment pressure is reduced. It is expected that the scale of this debt swap may exceed the 12 trillion yuan scale from 2015 to 2018, which is expected to significantly alleviate the contraction tendency of some local finances in recent years due to debt issues."Last year in the fourth quarter, China issued 1.5 trillion yuan in special refinancing bonds specifically for debt resolution. It is expected that the intensity of this round of debt resolution will be even higher, which will help alleviate pressure on local governments," said an analysis by CICC.

At the same time, real estate policies involve three aspects: first, allowing special bonds to be used for land reserves; second, supporting the acquisition of existing housing with special bonds plus subsidies for affordable housing projects; and third, timely optimization and improvement of relevant tax policies.

In the industry's view, these measures have a strong positive significance for the stabilization of real estate market expectations. In Huang Wentao's view, combined with the previous central bank's policy measures to strengthen the support for refinancing for affordable housing, the process of this round of real estate inventory collection is also expected to be further accelerated.

In addition, there are two additional policies: issuing special national bonds to support large state-owned commercial banks in replenishing their core tier-one capital, enhancing these banks' ability to resist risks and credit distribution; and increasing support and protection for key groups, with one-time living subsidies already distributed to people in difficulty before the National Day holiday, and the next step will be to increase the support for student groups, enhancing overall consumption capacity.

Lan Fo'an said that other policy tools are also under study, and the central finance still has a large space for debt issuance and deficit increase.

Overall, "this press conference is 'full of sincerity', directly responding to hot issues, and the four major additional measures that are going through procedures are all urgent matters. The scale of debt resolution will be 'the largest in recent years', and there is also 'a large space' for debt issuance and deficit increase," said Xiong Yuan, Chief Economist of Guosheng Securities.

In Xiong Yuan's view, the underlying logic of China's central leverage has undergone a major change. The "9·24" package of financial policies is aimed at easing policies on the asset side (stocks, houses), while this fiscal package of policies is aimed at easing policies on the liability side (local government debt and "three guarantees", real estate companies, residents), and both have both immediate financial arrangements and long-term institutional designs.

"The Ministry of Finance has released a positive signal, and future additional policies can be expected, but due to the incomplete legal procedures for some policies, the Ministry of Finance cannot disclose more scale data," Yu Bo, Chief Macro Analyst of Changjiang Securities, believes that the market is urgently concerned not only with short-term growth stability but also with the resolution and development of medium and long-term issues. The scale needs to face up to the fiscal gap, the rhythm should be early rather than late, and the structure should directly hit the pain points, looking forward to arranging sufficient debt scale and a reasonable expenditure structure, and taking an effective, healthy, and sustainable path of large-scale finance.

What impact will it have on the market?

In the past week, the A-share market has experienced significant fluctuations. On October 8, the Shanghai Composite Index opened at a high of 3,674.40 points, then fluctuated and adjusted, and closed at 3,217.74 points on the 11th, with a cumulative decline of 3.56% over four trading days. What impact will the policy signals released by the Ministry of Finance have on the market?Xiong Yuan believes that this fiscal package should help to stabilize confidence and expectations. After the implementation of various policies, it is expected to substantially alleviate the local debt pressure. The economy may see an improvement on a quarter-over-quarter basis, and it is recommended to pay high attention to investment opportunities in the equity market, while the bond market may face short-term adjustment pressure. Keep a close eye on the possible National People's Congress meeting at the end of October or early November, as related proposals may be announced in advance around October 20th.

"For the stock market, if subsequent fiscal stimulus is implemented and funds are strengthened for the 'three guarantees,' underpinning risks, it will enhance risk appetite and help boost market confidence. For the bond market, we expect the overall fluctuating trend of the 10-year Treasury yield in the short term. In the medium to long term, only if a large-scale fiscal stimulus policy for total demand is introduced will the bond market logic be reversed," said Li Chao, Chief Economist at Zheshang Securities.

Fang Yi, a strategist at Guotai Junan, believes that the key to the upward revision of stock market expectations lies in the change of attitude of the decision-makers towards economic policies and capital markets. This means that the current weak economic data and growth expectations are unlikely to substantially affect the stock market in the short term, but will further strengthen policy expectations.

"The driving force of this round of stock market trends comes from the decline in risk-free interest rates, which drives incremental funds into the market, and the improvement in investors' expectations for the risk outlook, which boosts risk appetite," Fang Yi believes that in terms of market rhythm, there will be a lift followed by rotation, with a decision at the end of the year. In terms of industry selection, in addition to liquidity, pay attention to growth prospects and quality. There are significant differences in the growth prospects of various industries, and the subsequent market main line will return to the fundamentals, with differentiated performance.

He suggests focusing on two directions: first, the central enterprise sector benefiting from the increase in the deficit ratio and debt resolution; second, pay attention to the profit outlook, and focus on growth assets with a production cycle that is expected to stabilize first, a relatively favorable supply-demand pattern, and increasing demand.

"The National News Conference released a relatively clear signal of fiscal stimulus, and against this background, the real estate chain and the pan-consumer field, which have adjusted after rising last week, are expected to perform well again in the short term," said CICC. At the same time, the attention to the performance of A-shares in the third quarter has increased, and companies and industries that may perform better than expected before the end of October may have a relative performance during the reporting period.

In addition to supporting the real estate and industry chain market that has recently回调ed significantly, Xiao Jinchuan, Co-Chief Macro Analyst at Huaxiang Securities, believes that according to this policy signal, one can also pay attention to the stimulating effect on residents' consumption tendency after the policy is implemented and the subsequent performance of the consumer sector, as well as the possibility of repair momentum in the banking sector.

Regarding the real estate sector, Guolian Securities believes that in the short term, the announcement of policy implementation details and follow-up by relevant departments still requires some time, and market valuation reactions may precede the performance of fundamental data; in the long term, there is still some room for incremental policies, and existing policies are expected to accelerate implementation, which may boost market confidence and drive market stability. It is recommended to pay attention to real estate agency platforms that benefit from the continuous implementation of policy benefits, increased activity in the primary and secondary housing markets, and core competitiveness, as well as urban investment-type real estate companies that benefit from local government debt resolution.