RMB, stocks rally amid stimulus

The renminbi rallied to its strongest level in more than a year and Chinese equities continued their rebound on Wednesday, after a potent policy package lifted investors' confidence in the Chinese economy, which is expected to sail through headwinds.

Economists, investment banks and asset managers said that policymakers' more decisive stance to shore up the economy, a global interest rate cut cycle, and low asset valuations have combined to make it a potentially good time to invest in Chinese financial assets, which are expected to attract more foreign inflow in the months ahead.

However, they cautioned that the forecast may be contingent upon the implementation of further policy support to address economic challenges, with the most urgent priorities being additional fiscal spending to bolster domestic demand and direct funding to alleviate property sector woes.

On Wednesday, the renminbi, or Chinese yuan, rose to 6.9951 against the US dollar in the offshore market, up 158 basis points from the previous close and past the 7-per-dollar milestone for the first time in 16 months.

Guan Tao, global chief economist at BOCI China, said that the renminbi's rally is attributable to both Tuesday's policy release, which strengthened investors' confidence in China's economy, and the US Federal Reserve's interest rate cut last week, which narrowed the yield spreads between US and Chinese bonds.

Looking ahead, Guan said the renminbi is likely to register two-way fluctuations against the dollar, with limited possibility of one-sided, drastic appreciation because uncertainties remain surrounding the Fed's pace of rate cuts, including that the Fed might even reconsider rate hikes if the US economy turns out to be overheated.

Moreover, the People's Bank of China, the country's central bank, is expected to take measures to prevent any renminbi exchange rate overshooting if needed, and has accumulated rich experience in this regard, said Guan, who had served as head of the Balance of Payments Department at the State Administration of Foreign Exchange.

Guan added that in the base case scenario, in which the United States achieves a soft landing while the Fed continues rate cuts, foreign institutions may continue to boost holdings in renminbi-denominated bonds, especially treasury bonds.

As of August, overseas institutions' holdings in China's interbank bond market had risen for 12 consecutive months, an increase in foreign holdings of as much as 1.34 trillion yuan ($190.7 billion), according to the PBOC's Shanghai head office.

Upbeat sentiment

The upbeat sentiment was seen in the A-share market as well. The Shanghai Composite Index went up 1.16 percent to Wednesday's close of 2,896.31 points, extending a jump of 4.15 percent on Tuesday, the biggest rise in about four years.

"I believe that this may be a good time to revisit Chinese stocks," said David Chao, global market strategist for the Asia-Pacific region (excluding Japan) at Invesco, a global investment management company.

Chao said China has fired off a meaningful monetary stimulus salvo, which may potentially usher trillions of renminbi in liquidity if fully implemented, sending a strong signal that the government is responding to economic headwinds.

Major package

On Tuesday, China's top financial regulators unveiled a set of measures that some analysts said might be the country's biggest monetary stimulus package following the pandemic.

This includes a 20 basis point reduction in the seven-day reverse repo rate, a key policy benchmark of interest rates, as well as a 50 basis point cut to rates on existing mortgages and another 50 basis point cut to the reserve requirement ratio, apart from other steps supportive of the property and stock markets.

The PBOC started to put the package into action by lowering the one-year medium-term lending facility rate, a policy rate, by 30 basis points to 2 percent on Wednesday.

A Goldman Sachs report said on Wednesday that the latest stimulus package would be strong enough to catalyze a policy-induced rally in shares listed in Hong Kong and on the Chinese mainland, though it would be unlikely to "turn things around fundamentally".

The report said a relending program unveiled on Tuesday would allow listed companies to borrow inexpensive money to shore up stock prices and boost investor sentiment, while the stock stabilization fund that is under policy study, if launched, might help fend off systemic risks in the stock market, as indicated by experiences in other markets.

While the PBOC introduced two new policy tools aimed at boosting stock market liquidity, the China Securities Regulatory Commission released a guideline on Tuesday to encourage mergers and acquisitions and a draft rule to strengthen listed companies' market capitalization management.

Yet more could be done, with Goldman Sachs saying that "we would turn more aggressive on A shares when signs of property market stabilization emerge or policy momentum further strengthens".

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank, underlined the importance of beefing up fiscal support, as "monetary easing would be less effective without proactive fiscal policy".

It is likely that the government will increase bond issuance to accelerate government spending, Ding said, adding that investor sentiment could improve if policymakers decide to broaden the use of bond proceeds, especially to reduce home inventory.

Ding said that Standard Chartered Bank analysts retain the base case forecast that the renminbi will stay within the range of between 7 and 7.1 against the dollar by the end of the year.