China stimulus package puts Shanghai index on best run for 28 years

China’s main stock index has accelerated at the quickest pace since 1996 over the past week thanks to policymakers significantly stepping up support measures to arrest sluggish economic growth.
The Shanghai Composite index (SSE) climbed by 248.97, or 8.06 per cent, to 3,336.50 on Monday, the highest daily gain since September 2008.
Analysts at Deutsche Bank, the German investment bank, said that the rise took the Shanghai Composite’s five-day rolling increase to more than 20 per cent, the steepest increase over that period in more than two decades.
“It closes out a remarkable five-day run since we saw the first in a series of stimulus measures from the Chinese authorities early last week”, they wrote in a note to clients.
The CSI 300, another stock index that reflects the share performance of China’s largest companies, rose by 314.17, or 8.48 per cent, to 4,017.85. Hong Kong’s Hang Seng index jumped by 501.38, or 2.43 per cent, to 21,133.68 on Monday.
The rises were supported by the official manufacturing PMI survey posting a stronger than expected reading of 49.8, up from 49.1 August but still below the 50-point threshold that separates growth and contraction.
Over the past year, Beijing has announced a series of policy tweaks designed to offset the damaging effects of a prolonged real estate crisis on economic growth, moves which have been routinely characterised by experts as being piecemeal.
However, last week policymakers slashed key interest rates and set up a lending facility for companies to use to buy back their own shares, a tactic that often raises equity prices. The tool is most likely to be used by China’s “National Team” of state-backed firms that often intervene in the stock market to support prices.
The Chinese Community Party’s politburo, the top decision-making committee led by President Xi, then signalled that the government would borrow money to fund investment spending. It was, however, unclear whether this would be funded with further bond sales beyond what has already been announced.
The combination of monetary and fiscal policy support measures has been seen by economists as necessary to reversing China’s economic downturn. Analysts at Gavekal Dragonomics, a consultancy focusing on the Chinese economy, said that the expansion of economic stimulus “pretty much guarantees that the rise in equities will continue”.
They said: “A bullish outcome — that another stimulus-driven mega-rally is now under way — rests upon policymakers following through strongly and rapidly on [last week’s] promises and leaks, both in terms of the scale of fiscal stimulus and in terms of support for the property sector.”
Previous periods of rapidly rising stock markets in China have been fuelled by Beijing injecting additional spending into the economy. After the 2008 global financial crisis, a large stimulus package helped to drive up stock prices in the world’s second largest economy.
Beijing has been hesitant to launch a stimulus package of similar scale to tackle the present economic slowdown for fear of exacerbating income inequality and wasting money on unproductive investments. Xi has made narrowing inequality one of his central policy goals.
Japan’s Nikkei 225 index slid by 1,910.01, or 4.8 per cent, to 37,919.55, signalling that investors were uneasy about the shock selection of Shigeru Ishiba as the country’s next prime minister.
Analysts at RBC said that Japanese stocks struggled thanks to Ishiba’s victory over Sanae Takaichi, his closest rival, raising the chances of fiscal and policy tightening.
“Takaichi was seen as favouring more stimulus whereas Ishiba is seen as supportive of the Bank of Japan’s policy of gradual policy tightening and representative of policy continuity.” Ishiba is expected to call a snap election in the coming days.
The Bank of Japan has been incrementally raising interest rates from negative territory over the past year after high import and energy prices pushed up inflation in Japan to the highest rate in four decades.