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2024 Chinese Stimulus Package Basics & How it's Impacting Chinese and Hong Kong Stocks

Views 1419 Oct 4, 2024

Key takeaways

  • The 2024 Chinese stimulus package, announced in September, is one of the country's most significant efforts to address its slowing economy.

  • The package includes a combination of monetary measures, including cutting interest rates and lowering the reserve requirement ratio (RRR) for banks. These actions aim to inject around $113-114 billion into the economy to improve liquidity, boost the housing market, and stabilize financial markets.

  • While the stimulus measures have led to short-term boosts in the stock market, analysts argue that more extensive fiscal policies will likely be needed to sustain long-term growth.

The Chinese Stimulus Package 101

The 2024 Chinese Stimulus Package is a comprehensive set of monetary and fiscal measures aimed at reviving China's slowing economy, which faces challenges like a struggling property market, weak consumer demand, and deflationary pressures. Key components of the package include:

  • Interest rate cuts: The People's Bank of China (PBOC) lowered the seven-day reverse repurchase rate to 1.5%, down from 1.7%, and reduced the medium-term lending facility (MLF) rate.

  • Reserve requirement ratio (RRR) cuts: The RRR for major banks was reduced by 0.5 percentage points, freeing up around 1 trillion yuan ($137 billion) in liquidity for banks, which should improve lending to businesses and consumers.

  • Property market support: Down-payment requirements for second-home buyers were cut from 25% to 15%, aimed at reviving the struggling real estate sector. Local governments were also provided with funds to help buy unsold homes.

  • Equity market support: New financial tools were introduced to stabilize stock markets, including allowing listed companies and major shareholders to buy back shares to increase liquidity and support investor sentiment.

Reasons for the Chinese Stimulus Package

The 2024 Chinese Stimulus Package reflects a multifaceted approach to address current economic challenges and support sustainable growth. By focusing on stimulating demand, supporting key sectors, and stabilizing the real estate market, the government aims to foster a robust recovery. Here's a deeper dive into why.

  • Economic recovery post-COVID-19: China's economy has been recovering from the impact of the COVID-19 pandemic, which disrupted supply chains and consumer demand. The stimulus aims to boost economic activity and consumer spending, supporting a robust recovery.

  • Weak domestic demand: Despite some recovery, domestic demand remains weak, particularly in consumer sectors. The government is eager to stimulate spending to support businesses and ensure economic stability. Initiatives within the package are designed to enhance consumer confidence and spending power.

  • Support for key sectors: The stimulus package targets specific sectors that are critical for long-term economic growth, such as technology, renewable energy, and infrastructure. This focus aligns with China's strategic goals of transitioning to a more sustainable and innovation-driven economy.

  • Employment support: With rising unemployment and concerns about job security, particularly among young workers, the government aims to create jobs and provide training opportunities through this package.

  • Real estate market stabilization The real estate sector has faced significant challenges, including a crisis among major developers. The stimulus is expected to stabilize the market, addressing unsold inventory and providing support for housing purchases, which is vital for broader economic health.

  • Geopolitical and global economic pressures: The package also serves to counteract negative effects from geopolitical tensions and slowing global growth. By bolstering the domestic economy, the Chinese government aims to reduce reliance on external markets and enhance resilience against global uncertainties.

Potential pros and cons of the Chinese Stimulus Package

The 2024 Chinese Stimulus Package has pros and cons as it attempts to revive China's slowing economy, boost the housing market, and mitigate deflationary pressures. Here's an overview:

Potential pros:

  • Increased liquidity: The People's Bank of China (PBOC) cut interest rates and reduced the reserve requirement ratio (RRR) for banks, injecting over $113 billion into the economy. This increased liquidity encourages lending and investment, providing immediate support to businesses and consumers.

  • Support for the property market: The stimulus package includes policies aimed at stabilizing the struggling real estate sector. Measures such as lowering the down-payment requirement for second-home buyers and supporting local governments in purchasing unsold homes are designed to stimulate housing demand.

  • Boost to stock market confidence: By providing central bank funding to help listed companies buy back shares, the package aims to stabilize the stock market and restore investor confidence. The stock market has already reacted positively in the short term, with key indexes showing improvement.

  • Lower borrowing costs:The reduction in interest rates lowers borrowing costs for businesses and individuals, which can help stimulate consumption and investment. This is particularly important for boosting economic activity in a slowing economy.

  • Tackling deflationary pressures: By cutting interest rates and encouraging more spending, the package aims to address China’s deflationary risks. Increased consumer and business activity can help lift prices and combat deflation.

Potential cons:

  • Limited impact on consumer demand: The stimulus package focuses more on monetary policy and the property sector but doesn't directly stimulate consumer demand. With rising unemployment and weakened consumer confidence, the package may not be enough to encourage the necessary level of spending to drive sustained growth.

  • Real estate overhang: While the package supports the property sector, China’s real estate crisis is deep-rooted. Excess housing supply, falling home prices, and a loss of confidence among buyers are long-term issues that may not be fully resolved by these measures alone.

  • Short-term relief, long-term challenges: While the package provides short-term boosts, especially in financial markets and liquidity, it may not address China’s deeper structural challenges, such as high debt levels, regional economic imbalances, and a slow shift toward consumer-led growth.

  • Ineffectiveness in isolating structural problems: Analysts suggest that China's reliance on monetary easing and property sector relief might not be enough to overcome more significant issues like low productivity growth, income inequality, and an aging population.

  • Risk of over-leveraging: Injecting more liquidity into the system could further exacerbate China’s already high debt levels, especially at the local government level. Increased borrowing without accompanying reforms could lead to long-term financial instability.

Past and present Stimulus Packages and their impact on stocks

  • 2008–2009 Chinese stimulus package was instrumental in boosting the stock market and helping China navigate the global financial crisis. It primarily benefited sectors linked to infrastructure and construction, but it also raised concerns about asset bubbles and long-term debt sustainability. Overall, the stimulus led to a strong market recovery, but the rapid growth it sparked required careful management in the years that followed.

  • Post-COVID Chinese stimulus package had notable effects on the stock market, providing both short-term gains and long-term uncertainties. In response to the economic slowdown caused by strict COVID-19 lockdowns, China introduced measures in 2022 and 2023 aimed at reviving its economy through a mix of monetary easing, fiscal spending, and targeted support for key sectors.

  • The 2024 Chinese stimulus package had an immediate positive impact on the Chinese stock market, particularly in the short term. After the announcement of the measures, the CSI 300 Index, which tracks the top companies on the Shanghai and Shenzhen stock exchanges, surged by 4.3%, almost erasing its year-to-date losses. This rebound was largely attributed to investor confidence in the government's commitment to supporting the economy and stabilizing financial markets.

Basics of Chinese stocks

Chinese companies can issue different classes of shares, such as A, B, and H, depending on where the company is listed and who can own the shares. A-shares are priced in the local renminbi (RMB) yuan currency and are listed on the Shanghai or Shenzhen stock exchange. They were originally only available to domestic investors, but professional foreign investors with a special license can now invest in them under certain restrictions.

B-shares are priced in U.S. dollars and are listed on the Shanghai or Shenzhen stock exchange. They have been open to foreign investment since 2001. H-shares are listed on the Hong Kong stock exchange and are traded in Hong Kong dollars (HKD). They have been open to foreign investment for many years.

Chinese stocks are traded on exchanges with similar listing requirements to U.S. exchanges, but the rules and norms differ. For example, Chinese accounting standards differ from U.S. generally accepted accounting principles (GAAP). Most large Chinese companies are fully or partly government-owned.

For investors interested in trading Chinese stocks, they are available on the moomoo app.

Major Chinese Stock Exchanges

In mainland China, there are three main stock exchanges: the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and the Beijing Stock Exchange (BSE). These exchanges are important to China's economic development and offer a wide range of investment opportunities.

  1. Shanghai Stock Exchange (SSE): One of the largest stock exchanges in the world as defined by market capitalisation, it focuses on larger, well-established companies. It trades in A-shares (dominated by Chinese investors) and B-shares (traded in foreign currencies, accessible to foreign investors).

  2. Shenzhen Stock Exchange - This exchange is known for smaller and high-growth companies, especially in the technology sector. Like the SSE, it trades in A-shares and B-shares.

  3. Beijing Stock Exchange - The exchanges serves as a vital platform for small and medium-sized enterprises (SMEs) in China, aligning with the government's focus on innovation and economic resilience.

Basics of Hong Kong stocks

The minimum trading unit for stocks is one lot, ranging from 10 to over 0.1 million shares. The amount per lot can range from tens to hundreds of thousands of Hong Kong dollars. The Hong Kong stock market uses a T+2 settlement cycle, meaning that the securities and clearing organizations settle the funds and securities two trading days after the sale date.

Hong Kong stocks are mainly divided into the main board and the Growth Enterprise Market (GEM). The main board has more mature companies, while the GEM has less strict listing conditions.

Investors can also invest in Hong Kong stocks through American Depository Receipts (ADRs), which are available on U.S. exchanges. ADRs offer the same level of protection and ease as domestic stocks, but there are fewer Hong Kong stocks available than on the Hong Kong exchange.

For investors interested in trading Hong Kong stocks, they are available on the moomoo app.

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commission-free trading on moomoo

Stock Exchange of Hong Kong

An international financial hub, the stock exchange of Hong Kong (HKEX) allows both Chinese and foreign companies to list. It’s widely accessible to international investors and often trades large Chinese corporations in H-shares (shares of Chinese companies listed in Hong Kong). HKEX has trading hours including Monday to Friday from 9:30 AM–4 PM local time, along with a pre-opening session from 9 AM–9:30 AM and an after-hours trading session from 4 PM–random closing between 4:08 PM and 4:10 PM.

Potential risks & rewards of buying Chinese and Hong Kong stocks

Investing in Chinese and Hong Kong stocks can provide significant growth opportunities and diversification benefits, but it also comes with risks related to regulatory environments, market volatility, and geopolitical tensions. Here's a look at potential risks and rewards.

Potential rewards

  • China's stock market has a lower correlation with other major markets, which can make it a good diversifier.

  • Chinese investments can have low valuations, which can create value investments.

  • China's economy is growing rapidly, which can create opportunities for companies to grow.

  • HKEX can have high dividend yield investing opportunities.

Potential risks

  • The government can force companies to operate differently, pay penalties, or pay special taxes.

  • Investors should be aware of corporate ownership structures, especially variable interest entities (VIEs). VIEs can receive economic benefits from a company without owning shares.

  • Geopolitical concerns include the possibility of China gaining control of Taiwan.

  • Accounting rules may not be as transparent as in the US.

  • Investors are exposed to currency risk if they invest in a company that earns profits in another currency.

How to buy Chinese and Hong Kong Stocks on the moomoo app

For Hong Kong stocks, investors to have an open moomoo account. If you don't have one, start here: open account.  Once approved, you can find HK ADRs to see market data on ADRs from more than 150 Hong Kong-listed companies. ADRs allow investors to trade in Hong Kong listed stocks through the US depositary banks issuing the ADRs in the US market.

In the desktop app, you can go to Markets > HK > HK ADR. Here is additional information for the moomoo app.

For Chinese stocks, you can trade in the A-shares market. Stock Connect includes Shanghai Stock Connect and Shenzhen Stock Connect is the northbound trading part of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.

After opening a China A-share account, investors can directly trade eligible stocks in the Shanghai and Shenzhen markets through Moomoo Financial Inc. For users who have not opened a Moomoo Financial Inc. Account, please open one by activating a China A-share Account.

For moomoo users who already have an open account, you can open a China A-share Account by tapping an A share stock you'd like to trade and tapping the Activate icon on the lower left hand of the Detailed Quotes page on moomoo.

The account will be opened successfully after approval from these steps and you will be notified by system message and email.

If your China A - share Account is activated by 10:00 am on a trading day, you will be able to trade A shares on the T+1 date. If your China A - share Account is activated after 10:00 am on a trading day, you will be able to trade A shares on the T+2 date.

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Chinese and Hong Kong stock sectors benefiting from the Chinese Stimulus Package

  • Infrastructure and construction: A major focus, this includes investments in roads, railways, and urban projects. This has led to increased demand for construction companies and related industries.

  • Real estate: This aims to stabilize the real estate market by offering support for unsold housing inventory and easing regulations for homebuyers. This has positively influenced real estate developers and property management companies.

  • Renewable energy and environmental technologies: The Chinese government has emphasized green technology and renewable energy in its recovery plans. Companies involved in solar, wind, and electric vehicle production are benefiting.

  • Consumer goods and retail: Stimulus measures aimed at boosting domestic consumption have benefited retail and consumer goods sectors.

  • Technology: The tech sector is also benefiting, especially companies involved in digital infrastructure and technology services.

  • Financial services: Banks and financial institutions are likely to benefit from the liquidity injection and eased monetary policies associated with the stimulus.

Key Differences between Chinese, Hong Kong, and American Stocks

Here are four key differences between Chinese, Hong Kong, and American stocks:

Market structure

  • Chinese stocks: Primarily traded on the Shanghai and Shenzhen Stock Exchanges, stocks are categorized into A-shares (available mainly to domestic investors) and B-shares (denominated in foreign currencies, accessible to foreign investors). The market is heavily regulated by the China Securities Regulatory Commission (CSRC), and the government has significant control over economic policies, impacting stock performance.

  • Hong Kong stocks: Traded on the HKEX, which operates as a gateway for international investors to access Chinese companies. Hong Kong stocks include H-shares (listed in HK but from mainland companies) and Red Chips (companies with substantial business in mainland China but listed in Hong Kong). The market is influenced by both Chinese and global market conditions, and regulatory practices are generally more aligned with international standards.

  • American stocks: Traded on major exchanges like the New York Stock Exchange (NYSE) and NASDAQ. The U.S. stock market is known for its liquidity, depth, and diversity of investment options and it regulated by the Securities and Exchange Commission (SEC), ensuring high transparency and stringent reporting standard.

Investment accessibility

  • Chinese stocks: Historically restricted to domestic investors; however, programs like Stock Connect allow foreign investors to trade A-shares through Hong Kong. The investment process can be complex due to language barriers and regulatory requirements.

  • Hong Kong stocks: Generally more accessible to international investors than Chinese A-shares, the market operates in both Chinese and English, making it easier for foreign investors to navigate.

  • American stocks: Highly accessible to both domestic and international investors. U.S. markets are known for their extensive use of technology and digital platforms for trading, making transactions straightforward.

Economic and regulatory environment

  • Chinese stocks: The Chinese government plays a significant role in the economy, with direct involvement in many sectors. This can lead to sudden regulatory changes that may impact stock prices.

  • Hong Kong stocks: While Hong Kong operates under a "one country, two systems" framework, it maintains a relatively high degree of autonomy. However, recent political developments have raised concerns about regulatory changes and their impact on businesses.

  • American stocks: The U.S. has a stable and mature market with strong protections for investors. The regulatory environment is transparent, and companies are required to follow strict reporting and disclosure standards.

Sector composition

  • Chinese stocks: The market is dominated by sectors like technology, consumer goods, and financial services, reflecting the country's focus on innovation and infrastructure.

  • Hong Kong stocks: A significant portion of Hong Kong's market comprises financial services, real estate, and large Chinese corporations. Many of these companies have extensive international operations, making them attractive to foreign investors.

  • American stocks: The U.S. market is highly diversified, with strong representation from sectors including technology, healthcare, consumer discretionary, and financials. This diversity offers a wide range of investment opportunities.

Bottomline

The 2024 China stimulus package is anticipated to be a comprehensive effort to stimulate domestic demand, bolster key industries, stabilize the real estate market, and ensure social stability through job creation. The government is expected to leverage a combination of fiscal spending, infrastructure investment, and supportive policies for industries that align with its long-term strategic goals.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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