Post-Easing, Market Awaits "Fiscal" Policy Arrows

On September 24th,the Shanghai Composite Index soared by 4.15%,marking the largest single-day gain in four years.On September 25th,due to a cooling "short squeeze" effect,the main A-share indices experienced a slight decline at noon,but the total market turnover broke through the trillion yuan milestone.Concurrently,the Chinese yuan exchange rate (against the US dollar) once breached the 7 yuan threshold.

A few days earlier,on September 18th Eastern Time,the Federal Reserve announced a 50 basis point interest rate cut,initiating a new round of interest rate reductions.The tightening of overseas monetary policy was alleviated,providing greater operational space for China's monetary policy.

The macro team at CITIC Construction Investment analyzed that the theme of this meeting was "loose money".The decisions made by the central bank,the Financial Regulatory General Bureau,and the China Securities Regulatory Commission not only exceeded market expectations for monetary easing but also made breakthroughs in intensity and approach.This policy not only responded to the widely discussed issue of reducing the interest rates on existing housing loans but also introduced for the first time two major tools aimed at supporting the liquidity of the stock market,which was a pleasant surprise to the market.On that day,A-shares and the commodity market rose in tandem,while the bond market experienced a correction,especially in long-term bonds,showing the market's optimistic response to this easing policy.

The long-awaited moment in the market has finally arrived,but does this mean a market shift?Some analysts believe that after the "eight arrows" of loose money have been fired,there is still a need for an "arrow" of fiscal policy.

Zhou Junzhi,the Chief Macro Analyst at CITIC Construction Investment,stated that the market's expectations for the next round of policy easing have shifted towards the fiscal sector,hoping that fiscal efforts will stimulate real economic demand.This is also the focus of the current market divergence and the key to the future trend of stocks and bonds.If fiscal policy follows up further,it can be confirmed that this is an operation aimed at stabilizing growth; on the contrary,if fiscal efforts are limited,then the focus of this meeting is on improving liquidity.

To fundamentally solve the problems of insufficient confidence,weak consumption,and insufficient demand,it is still necessary to comprehensively use a variety of policy tools such as fiscal policy,income distribution reform,employment protection,monetary easing,and structural reforms to effectively solve short-term and medium to long-term economic issues.Income growth,stable expectations,improved social security,and the balance between investment and consumption are the long-term remedies for stimulating consumption and boosting the economy.

Liu Peiqian,an economist at Fidelity International Asia,said that the major favorable policy released by the financial regulatory authorities on September 24th positively boosted the market,and market sentiment will improve in the short term.Previously,the market expected the regulatory authorities to take more gradual measures,but this time the policy interest rate cut and related measures were announced at once,reflecting the government's high regard for supporting domestic demand.

The Central Political Bureau meeting held on September 26th pointed out the need to focus on key points,take initiative,effectively implement existing policies,and intensify the introduction of incremental policies to further improve the targeted and effective nature of policy measures,and strive to complete the annual goals and tasks of economic and social development.

Short term: Monetary policy exceeds expectations,boosting market confidence

On September 24th,the head of the financial regulatory authorities unexpectedly announced a package of financial policies and liquidity support measures at a press conference.The policy measures announced this time can be summarized into eight key directions,which market insiders call the "Eight Arrows":

1.RRR Cut: It is announced that the reserve requirement ratio will be reduced by 0.5 percentage points,providing about 1 trillion yuan of long-term liquidity to the financial market.

2.Interest Rate Cut: The Medium-term Lending Facility (MLF) interest rate is reduced by 30 basis points,from 2.30% to 2.00%.

3.Reduction of Existing Housing Loan Interest Rates: Adjustments to existing housing loan interest rates are expected to result in an average decrease of 0.5 percentage points.

4.Reduction of Down Payment Ratio for Second Homes: The minimum down payment ratio for second homes is reduced to 15%.

5.Creation of Monetary Policy Tools to Support Stock Market Stability: The creation of securities,fund,and insurance company swap facilities,as well as stock repurchase and increase in lending tools,aims to support stock market liquidity and boost market confidence.

6.Promotion of Medium and Long-term Capital into the Market: Issuance of relevant guidelines to encourage more medium and long-term capital such as pensions and insurance to enter the capital market,promoting "long money for long-term investment" to stabilize the long-term development of the stock market.

7.Strengthening Market Value Management and M&A Restructuring.

8.Optimization of Guaranteed Housing Re-lending Policies and Support for the Acquisition of Real Estate Companies' Existing Land.

Zhou Junzhi stated that the specific policies announced at the press conference target liquidity issues in five major areas: banks,residents,the stock market,real estate companies,and small and medium-sized enterprises.Among them,two stock market liquidity improvement tools are particularly noteworthy.

From the market performance perspective,the stock market reacted strongly on September 24th and 25th.On the 24th,the Shanghai Composite Index rose by 4.15%; on the 25th,the Shanghai Composite Index continued to rise by 1.16%,with the total market turnover breaking through the trillion yuan mark.

Short-term measures such as RRR cuts and interest rate cuts directly alleviated market concerns about tight funding and enhanced the liquidity of the banking system.Especially on September 25th,during the MLF operation,the central bank reduced the interest rate by 30 basis points,in line with market expectations for loose policy.The interest rate cut in this MLF operation exceeded the previous 7-day reverse repo operation,demonstrating the regulatory intention to improve the transmission efficiency of monetary policy by smoothing the interest rate curve and eliminating the abnormal protrusion of one-year interest rates.

At present,the market recovery is mainly due to the liquidity easing brought by monetary policy,especially the newly created policy tools that will directly support large-cap stocks and high dividend stocks.These stocks have strong liquidity and high stability,becoming the focus of short-term capital inflow.The combined effect of RRR cuts and interest rate cuts provides the market with more abundant funds,further enhancing market risk appetite.

Ni Yixiang,Co-Chief Investment Officer and Fund Manager of Fidelity Fund Management (China) Co.,Ltd.,said: "The most unexpected content in this policy is mainly reflected in the support for market liquidity,which is clearly beneficial to large-cap stocks and high dividend stocks.Monetary policy has exceeded expectations,and whether the market performance can continue mainly depends on whether fiscal policy can exert force synchronously."

Ni Yixiang explained that if the overall corporate profitability cannot be improved,with further interest rate declines,the asset shortage may intensify,and stable high dividend,high liquidity large-cap stocks will have more investment and allocation value."Before fiscal policy further exerts force,we continue to be optimistic about high dividend and large-cap high liquidity stocks; for the consumption and real estate sectors,we remain cautious.Looking forward to the market,we expect fiscal policy to exert force."

It is worth noting that the Central Political Bureau meeting held on September 26th emphasized the need to reduce the reserve requirement ratio and implement forceful interest rate cuts.It is necessary to promote the real estate market to stop falling and stabilize,strictly control the increase in commercial housing construction,optimize the existing stock,and improve quality.Increase the loan distribution for "white list" projects and support the revitalization of idle existing land.Respond to public concerns,adjust housing purchase restrictions,reduce existing housing loan interest rates,and urgently improve policies on land,finance,and finance to promote the construction of a new real estate development model.Strive to boost the capital market,vigorously guide medium and long-term capital into the market,and unblock the capital market entry points for social security,insurance,and financial management.Support the merger and reorganization of listed companies,steadily promote the reform of public funds,and study the introduction of policy measures to protect small and medium investors.

With the arrival of the Federal Reserve's interest rate cut window,the central bank seized the opportunity to minimize the depreciation pressure of the yuan and provided ample liquidity support for the financial market.However,relying solely on the loosening of monetary policy cannot fundamentally solve the current problem of insufficient effective demand.Although monetary policy can stimulate market sentiment and improve liquidity in the short term,long-term economic recovery still requires the exertion of fiscal policy,making the market more eagerly期待 further policies on the fiscal side.Mid-term: A Combination of Policy Measures Still Requires Fiscal Strength

In the mid-term,monetary policy alone is insufficient to address deep-seated economic challenges.

Zhang Jiqiang,the head of the Research Institute at Huatai Securities,believes that although the reduction in the MLF (Medium-term Lending Facility) operation rate is beneficial for the stability of banks' net interest margins,its overall effect should not be overinterpreted.Currently,monetary policy is mainly aimed at alleviating short-term liquidity issues and helping the capital market achieve localized rebounds,but its long-term impact on issues such as weak consumption and insufficient demand is relatively limited.

Despite the positive stock market performance on September 24th and 25th,there are still hidden concerns.The core issue of China's economy remains the lack of effective demand,especially against the backdrop of a long-term sluggish real estate market and high local government debt.The marginal effect of monetary policy is gradually diminishing and cannot fundamentally solve the challenge of insufficient demand.

For example,favorable policies in the real estate sector (such as reducing the interest rates on existing mortgages and lowering the down payment for second homes) may help boost market sentiment in the short term,but medium and long-term issues such as changes in population structure and low expectations for housing prices still constrain the comprehensive recovery of the real estate market.In addition,the debt pressure of local governments limits the space for investment.

Looking back at history,the fiscal cycle has played a crucial role in China's economic development.The latest research report from CITIC Construction Investment,"The First Fiscal Cycle: On and Off Budget," points out that after the 1994 tax reform and the 1998 housing commercialization reform,the expansion and contraction of the fiscal cycle have formed the core of China's economy.Currently,we are in the contraction phase of the third fiscal cycle.Understanding the operation rules of the fiscal cycle can better help us understand the current stage of the economy and why policy determination can exceed market expectations.

The core of the fiscal cycle lies in the expansion and contraction of local financial resources.Zhou Junzhi pointed out that the 2008 four trillion fiscal expansion promoted the rapid recovery of China's economy,but it also left issues such as high leverage,high debt,and high financial risks.Therefore,in recent years,the central government has strengthened control over local debt,striving to resolve the implicit debt risks of local governments through debt swaps and budgetary controls.However,during the debt contraction phase,fiscal austerity has made local governments unable to invest sufficiently in infrastructure and stimulate demand.

Therefore,in the mid-term,the coordination of fiscal policy is crucial.Expanding the fiscal deficit,issuing special bonds,supporting emerging industries such as scientific innovation and high-end manufacturing,and even subsidizing enterprises and residents will directly boost demand and enhance market confidence.Especially when local government finances are tight,fiscal transfers from the central government are particularly critical.

The Central Political Bureau meeting held on September 26th also emphasized the importance of fiscal policy.The meeting stressed the need to increase the counter-cyclical adjustment efforts of fiscal and monetary policies,ensure necessary fiscal expenditures,and effectively carry out the "three guarantees" work at the grassroots level.It is important to issue and use long-term special government bonds and local government special bonds well,to better leverage the driving effect of government investment.

Long-term: The Key to High-quality Development and Structural ReformFaced with the dual pressures of external shocks and internal economic strains,the market holds high expectations for the role of fiscal policy.

Cheng Hao,fixed income fund manager at Fidelity Fund Management (China) Co.,Ltd.,pointed out that the core issue the current economy is facing is a lack of effective demand,which is not caused by monetary policy and thus cannot be resolved solely by it.On one hand,the high leverage ratio and debt risks of local governments limit the role of infrastructure in counter-cyclical adjustments.On the other hand,the real estate market also faces long-term structural issues brought about by a slowdown in population growth and a phased saturation of urbanization.In addition,under these macro pressures,businesses and individuals face increased uncertainty about income,leading to reduced spending and a negative cycle.Therefore,compared to monetary policy,fiscal policy needs to step up its efforts to stimulate demand.

In the long term,although the monetary policy in the "eight arrows" approach has alleviated some short-term liquidity issues,it is difficult to effectively change the situation of weak consumption and insufficient investment in the short term.This exposes structural issues,especially the reality of high local government debt and limited fiscal expansion.To truly put the economy on the track of high-quality development,fiscal policy and structural reforms must work together.However,the constraints of local debt have prevented fiscal policy from being fully implemented.

To solve the current economic predicament,it is necessary in the short term to stimulate demand through expansionary fiscal policy.Although monetary policy can alleviate short-term market pressures,the intervention of fiscal policy is crucial to truly stimulate effective demand and consumer spending.If fiscal policy is delayed,the marginal effects of monetary policy will gradually decrease.

A report from Nomura Securities points out that the challenges in the real estate market are one of the most severe issues facing China's economy at present.Especially when homebuyers lose confidence in the delivery of off-plan properties,how to ensure the smooth delivery of projects is key to restoring market confidence.Although the market has discussed the possibility of large-scale home purchases to destock,Lu Ting,Chief Economist of Nomura Securities China,believes that the truly effective measure is for the government to directly fund unfinished projects,acting as the "last builder" to promote the delivery of these projects,rather than simply buying unsold houses.

In terms of supporting the upgrade of consumption and expanding domestic demand,the long-term development momentum of China's economy comes from the improvement of consumption.Fiscal subsidy policies may become the focus of future fiscal policy efforts.

In the resolution of local debt risks,as the dependence of local government revenue on land finance increasingly shows its limitations,local debt pressure has become one of the potential risks to China's economy.In the long run,whether the central government may alleviate the financial tension of local governments through increasing transfer payments and other means.

Currently,the market's expectations for fiscal policy are focused on increasing the fiscal deficit and expanding the scale of bond issuance.

The Central Political Bureau meeting held on September 26 provided a clearer policy signal for the market—to increase the counter-cyclical adjustment strength of fiscal and monetary policies.

After all,monetary policy mainly solves the "quantity" issue,while the improvement of "quality" still relies on fiscal efforts.Fiscal policy can not only directly stimulate effective demand but also promote the optimization and upgrading of the economic structure by supporting emerging industries such as scientific and technological innovation and high-end manufacturing.Therefore,the implementation and further advancement of fiscal policy have become the key to ensuring the economy's long-term positive trend.