China proposes stock stabilisation fund to lift economic confidence

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China’s financial sector authorities have proposed setting up a stock market stabilisation fund to boost flagging confidence among domestic investors, as a new release of data showed the recovery in the world’s second-largest economy remains fragile. 

Four people familiar with the matter have said Beijing is considering the plan, which would probably invest in domestic equities through existing financial institutions and professionally managed funds, according to one of the people. The government money would be matched by its partner funds and institutions, the person added.

Two of the people said that financial sector regulators including the stock market watchdog — the China Securities Regulatory Commission — and the Ministry of Finance have submitted the proposal to the State Council, China’s cabinet, which would ultimately decide how the proposed fund would operate.

Two people familiar with the proposal said the programme would need to raise at least Rmb1tn ($137bn) to be effective. “The fund needs to be big enough to influence the market. A few hundred billion yuan isn’t enough to boost confidence. We need at least Rmb1tn,” said a government adviser involved in designing the fund.

Regulators have discussed the idea of a stabilisation or intervention fund since 2015, but the proposal gained new ground this year.

Beijing has struggled to rekindle confidence in China’s capital markets and the broader economy as a property market crisis and slumping foreign trade weighed on the country’s recovery from pandemic controls.  

That weakness was underlined by an official data release on Friday that showed China again teetered on the edge of deflation last month, with the consumer price index unchanged year on year in September. The producer price index, which measures the price of goods sold by manufacturers, declined 2.5 per cent year on year.

Both inflation metrics were marginally weaker than forecasts from analysts polled by Reuters. In August the CPI rose just 0.1 per cent, up from negative territory the month before, while the PPI contracted 3 per cent.

Trade data also released on Friday provided better news for policymakers. China’s exports fell 6.2 per cent in September compared with the previous year, an improvement from August’s decline of 8.8 per cent and beating analyst expectations of a 7.6 per cent contraction.

Imports in September also shed 6.2 per cent, better than the previous month’s 7.3 per cent decline but slightly missing expectations. The country’s trade balance for the month was $77.71bn, up from $68.36bn in August.

The proposed stabilisation fund comes as Beijing has strengthened efforts to shore up the country’s languishing stock market and staunch capital outflows. This week, authorities launched the first purchasing programme targeting top banks’ shares since the global financial crisis and barred brokers from opening offshore trading accounts for domestic investors.

The sovereign wealth fund Central Huijin, which bought the bank shares, promised to keep purchasing them in the next six months.

Despite these efforts, China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks is down about 1 per cent this week and lost more than 10 per cent in dollar terms year to date in the face of persistent foreign investor outflows.

The stabilisation fund would aim to rekindle entrepreneurial enthusiasm and spur new listings, creating a virtuous cycle that would lift domestic confidence in the economy, said one of the people familiar with the plan. This would also raise the availability of risk capital, the person added.

“We need a stock market boom to make households wealthier so they can spend more,” said the government adviser.

Chinese policymakers argue that the economy is resilient and on track to meet the official gross domestic product target this year of 5 per cent, the lowest in decades. The country is set to release third-quarter GDP growth figures next week.

Zou Lan, head of the monetary policy department at the People’s Bank of China, said on Friday that the central bank was closely watching the effectiveness of the steps it had taken, which include cuts to lending and mortgage rates, and that it had ample policy room to counter the economic challenges.

But analysts say that while the economy is showing signs of steadiness after a weak second quarter, the recovery is fragile, and policymakers have released a stream of only piecemeal support.

“CPI inflation at zero indicates the deflationary pressure in China is still a real risk to the economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “The recovery of domestic demand is not strong without a significant boost from fiscal support.”