Former PBOC Research Chief Attempts to Calm Stock Market Frenzy
Xu Zhong clarifies China's central bank is not directly aiding the stock market and asks investors to avoid "blind speculation"
Upon Beijing's dramatic and sometimes unorthodox monetary stimulus policies near the end of September, the Shanghai, Shenzhen, and Hong Kong stock markets soared before the weeklong October 1st National Day holiday, hitting their biggest weekly rise in 16 years.
That has energized Chinese retail investors who have suffered significant losses from the beaten-down markets, who dominated online discussions in the past two weeks with talks about running into stocks. While anticipating the press conference by the National Reform and Development Commission on Tuesday (October 8), the mom-and-pop investors seem to disregard the fact that there are few signs the economic fundamentals are improving and leading Chinese economists agree fiscal stimulus must follow.
Late yesterday (October 7), China’s leading financial media outlets [Caixin] [Yicai] published a commentary by someone with deep ties to the People’s Bank of China in what I believe is a warning to overzealous individual investors.
Xu Zhong is Deputy Secretary-General of China’s state-backed National Association of Financial Market Institutional Investors, a self-regulatory organization in the inter-bank market. Before this, he served at the People’s Bank of China (PBOC) for over 20 years, holding various positions, including Director-General of the Research Bureau and Deputy Director-General of the Financial Market Department.
Mr. Xu apparently doesn’t want to spook the market, so I think he buried the lede deep into his commentary. But as your Pekingnologist reads it, his message is clear:
A “swap facility” introduced by the PBOC in late September does not involve the injection of base money or an expansion of the central bank’s balance sheet, meaning the central bank is not directly intervening in the stock market.
Two of the new tools the PBOC now employs do not increase the central bank’s base money supply or expand the monetary supply. They are targeted policy tools with specific use conditions, and the red line of preventing bank credit funds from illegally entering the stock market remains a key regulatory principle.
At present, financial institutions should place great importance on investor suitability management and protection.
On the other hand, financial institutions must strengthen internal controls and compliance responsibilities, warn individual investors about risks, strictly control leverage, and prevent loans from flowing into the stock market under the guise of consumer loans. As the saying goes, “The stock market carries risks; investments must be made with caution.” Investors must be aware of these risks and base their decisions on their own risk tolerance, avoiding blind speculation.
Below is a translation of Xu Zhong’s article. All emphasis is mine.
徐忠：从高质量发展的视角看待一揽子政策
Xu Zhong: Assessing the Package of Policies from the Perspective of High-Quality Development
Recently, the Politburo meeting introduced a package of policies that significantly boosted the confidence of both domestic and foreign investors in China’s economy and capital markets. In my view, it is crucial to accurately understand and fully implement these policies from the perspective of high-quality development.
1. The package of policies introduced by the Politburo meeting has had an immediate and significant impact in reversing market expectations and boosting investor confidence.
Post-pandemic, China’s economy faced challenges such as insufficient effective demand, weak expectations, and considerable downward pressure. In addition, there were issues like local government debt, instability in the real estate market, and a significant weakening of the capital market’s financing function. These issues, intertwined, led to weak market expectations, reduced investor risk appetite, and a lowered consumer willingness to spend, creating a complex environment for economic operations. Against this backdrop, strong macroeconomic policies and reform measures were urgently needed to reverse market expectations, a consensus widely shared across society.
The Politburo meeting on September 26 clearly introduced policies aimed at stabilizing the real estate market and boosting the capital market, which played a crucial role in reversing market expectations. This package of policies has enhanced confidence in the government’s ability to address deep-rooted issues, raised market risk appetite, and increased consumer confidence. This is already reflected in the stock market, real estate market, and consumer behavior in the past days. However, the medium- to long-term improvement of China’s economic fundamentals will require continued support and coordination of these policies and reform measures. Promoting high-quality development and structural reforms is a long-term process that requires sustained effort.
2. High-quality development requires not only macroeconomic policies to maintain overall economic stability but also structural measures to address key issues.
China’s economy faces both a macro issue of insufficient effective demand and structural issues in sectors like real estate and capital markets. Solving the macro problem requires addressing these structural issues, and alongside supportive macro policies, targeted structural tools are objectively needed. This time, the central bank employed a combination of monetary policy tools, including lowering the reserve requirement ratio, reducing policy interest rates, and guiding loan market rates downward to create a favorable monetary and financial environment.
Given the importance of real estate in the economy, the central bank has supported the resolution of risks in the real estate market and its healthy development from a macroprudential perspective. In recent years, the People’s Bank of China has continuously improved its macroprudential policies for real estate finance, implementing comprehensive measures on both the supply and demand sides. These include multiple reductions in the minimum down payment ratio for personal housing loans, lowering loan interest rates, removing the lower limit on interest rates, and setting up refinancing policies for affordable housing purchases. Recently, in line with the central decision to promote the stable and healthy development of the real estate market, policies to lower mortgage interest rates and down payment ratios were officially implemented. These measures are expected to reduce the repayment burden on residents, and when paired with other policies, will help boost consumption and mitigate risks in the real estate market.
The two structural monetary policy tools introduced this time to support the healthy development of the capital market are part of a comprehensive reform of the capital market system. These tools are designed to implement institutional reforms to align investment and financing functions, as highlighted in the Third Plenary Session of the 20th Central Committee of the Communist Party of China. Similar structural monetary policy tools have precedents internationally. During the subprime mortgage crisis, the U.S. Federal Reserve introduced new structural tools, extending the scope of its lender-of-last-resort function from traditional deposit-taking institutions to non-deposit financial institutions. The Term Securities Lending Facility (TSLF), for instance, allowed primary dealers to exchange less liquid securities for U.S. Treasury bonds, thereby improving liquidity.
The “swap facility” introduced here does not involve the injection of base money or an expansion of the central bank’s balance sheet, meaning the central bank is not directly intervening in the stock market. In terms of operational principles, it is similar to the Federal Reserve’s TSLF, enhancing the financing and investment capacity of relevant institutions through securities swaps, thereby providing liquidity support. Financial regulatory authorities will impose strict qualifications and conditions on the institutions involved and set scientific collateral rates.
The 股票回购增持再贷款 “stock repurchase and holding increase refinancing” tool is developed by commercial banks to assist listed companies in market value management. It is specifically used by companies and shareholders for stock repurchases and holding increases, with strict restrictions on borrowers and the use of funds. This does not mean that bank funds are flowing into the stock market. Internationally, it is common for listed companies and shareholders to use bank loans for market value management, a service typically provided by investment banks.
Both structural monetary policy tools are market-based and part of long-term market reform efforts. These tools do not increase the central bank’s base money supply or expand the monetary supply. They are targeted policy tools with specific use conditions, and the red line of preventing bank credit funds from illegally entering the stock market remains a key regulatory principle. Financial regulatory departments should scientifically monitor and evaluate capital market operations and carefully select the appropriate time windows.
3. High-quality development objectively requires all parties to jointly maintain a stable and healthy capital market.
China’s economic transformation requires a healthy capital market to provide a favorable environment for corporate restructuring and mergers. To promote the conversion of new and old growth drivers, financial resources should be increasingly directed towards the five major areas [Technology Finance, Green Finance, Inclusive Finance, Pension Finance, and Digital Finance] and new productive forces. This requires monetary policy to provide a stable macroeconomic environment, while the capital market, financial institutions, and other sectors push forward relevant reforms, jointly creating an investment and financing environment that encourages innovation and emphasizes efficiency.
At present, financial institutions should place great importance on investor suitability management and protection. On one hand, they must encourage investors to remain confident in the long-term positive trajectory of China’s economy. The fundamentals of China’s economy, including its vast market and strong resilience, remain unchanged. At the same time, new situations and challenges have emerged, and these issues should be viewed objectively and calmly, as they are issues of development that will take time to resolve. On the other hand, financial institutions must strengthen internal controls and compliance responsibilities, warn individual investors about risks, strictly control leverage, and prevent loans from flowing into the stock market under the guise of consumer loans. As the saying goes, “The stock market carries risks; investments must be made with caution.” Investors must be aware of these risks and base their decisions on their own risk tolerance, avoiding blind speculation.
