China’s Economic Stimulus Plan Lifts Asian Stocks: Markets Wrap

(Bloomberg) — Asian stocks advanced after China’s central bank announced stimulus measures in a bid to reach this year’s economic growth target and stem a selloff in the equity market.

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Shares in Hong Kong gained the most, with key benchmarks rallying about 3%, while onshore Chinese indexes rose more than 1% as authorities said they are studying setting up a stock stabilization fund. The MSCI Asia Pacific Index climbed 0.5%, with Japanese equities also advancing after reopening from a holiday. The yield on China’s 10-year government bond declined to 2% for the first time on record.

China is planning at least 500 billion yuan ($71 billion) of liquidity support for stocks and will allow brokerages and funds to tap the central bank’s funding to buy equities after the benchmark CSI 300 Index fell to more than a five-year low earlier this month. That came as part of a broad package of policy measures to revive the economy, including a cut to a key short-term interest rate and lower borrowing costs on as much as $5.3 trillion in mortgages.

While the initial market response following the stimulus measures was positive, analysts see a risk that the rally may soon fizzle as some of the fundamental woes plaguing China’s economy, including deflationary pressure, remain unsolved.

“These measures clearly show Beijing now understands and appreciates the urgency of boosting stock market and housing market sentiment,” said Siguo Chen, portfolio manager at RBC BlueBay Asset Management. “Short term it will help market find a bottom, but long term I think we need to see more fiscal support.”

The People’s Bank of China will set up a swap facility allowing securities firms, funds and insurance companies to tap liquidity from the central bank to buy stocks, the governor said at a Tuesday briefing.

“This kind of measure can raise more funds, increase market liquidity, and can also improve market confidence to a certain extent in the short term, but it cannot change the market trend,” said Zhou Nan, founder and investment director at Shenzhen Long Hui Fund Management Co. “There is a high probability that in the short and medium term, the market will have to fall further before it bottoms out.”

US stock futures edged lower after the S&P 500 closed 0.3% higher in the previous session, a whisker away from last week’s all-time high.

Data released Monday showed US business activity expanded at a slightly slower pace in early September, while expectations deteriorated and a gauge of prices received climbed to a six-month high, stoking confidence the world’s largest economy can nail a soft landing. Investors are now awaiting data on the Fed’s preferred price metric and US personal spending later this week.

The yield on policy-sensitive two-year Treasuries fell one basis point to 3.58% in Asian trading, while longer dated Treasuries were little changed. Traders have been wagering on nearly three-quarters of a point of policy easing by year end, suggesting at least one more jumbo rate cut is in store.

Chicago Fed President Austan Goolsbee said with inflation approaching the central bank’s target the focus should turn to the labor market and “that likely means many more rate cuts over the next year.”

Neel Kashkari at the Minneapolis Fed also pointed to weakness in the job market, saying he backs lowering interest rates by another half percentage point by year end. His counterpart at the Atlanta Fed, Raphael Bostic took a moderate stance. Starting the central bank’s cutting cycle with a large step would help bring interest rates closer to neutral levels, but officials should not commit to a cadence of outsize moves, according to Bostic.