In a bid to bolster economic recovery, China may issue 2 trillion yuan (approximately US$280 billion) in special bonds to establish a stock market stabilization fund. This proposal comes from the Institute of Finance and Banking under the Chinese Academy of Social Sciences, a prominent government-affiliated research body. The call for the creation of this fund highlights the growing importance of China’s stock market as a tool for restoring confidence, particularly in the wake of economic challenges.
The Push for a Stock Market Stabilization Fund
The proposed fund aims to enhance the stability of China’s capital markets and support the country’s broader efforts to stimulate its economy. According to the report, such a fund would help stabilize the market by purchasing blue-chip stocks and exchange-traded funds, thus serving as a buffer during market volatility.
The timing of this proposal is critical. China’s stock market, home to over 200 million retail investors, has become an essential barometer of market sentiment. By using this fund to shore up confidence, policymakers hope to attract new investments from household savings, bank wealth management products, and foreign capital.
“The stock market responds more quickly to policy benefits, making it easier to attract incremental funds, thereby boosting market confidence almost instantly,” the report stated. With consumer confidence lagging, especially after a prolonged economic downturn, restoring faith in the stock market is seen as a crucial step.
A Struggling Economy and Mixed Policy Measures
China’s economy has been struggling with slow growth, registering a 4.6% GDP growth rate in the third quarter of 2024, the lowest quarterly rate in over a year. The country’s economic challenges are compounded by weakening consumer demand, declining property values, and persistent global economic headwinds.
In response, the government has rolled out a broad range of stimulus measures, including interest rate cuts, relaxed property restrictions, and initiatives aimed at boosting consumption. These measures have been designed to address the persistent slowdown in key sectors. However, they have so far failed to deliver a significant recovery, with growth still falling short of the annual target of around 5%.
To counter this, China’s central bank, the People’s Bank of China (PBOC), has moved swiftly to enact supportive monetary policies. In its most recent action, the PBOC initiated a 50 billion yuan (US$7.03 billion) swap facility to provide liquidity to the stock market. This facility allows brokers, fund managers, and insurance companies to exchange assets with poorer liquidity for more liquid assets, which can be used for stock purchases.
Table: Key Economic Stimulus Measures
| Measure | Objective | Impact |
|---|---|---|
| Interest Rate Cuts | Lower borrowing costs for consumers | Encouraged borrowing, but consumer demand remains weak |
| Eased Property Restrictions | Stimulate real estate market | Limited recovery in property values so far |
| 50 Billion Yuan Swap Facility | Provide liquidity to the stock market | Helped stabilize stock market sentiment |
| Proposals for 2 Trillion Yuan Bond Issuance | Fund stock market stabilization fund | Expected to boost confidence in equity markets |
Long-Term Funds and Capital Market Stability
One of the key suggestions in the report is to encourage more long-term institutional investments in China’s stock market. This could involve mobilizing funds from insurance companies, social security funds, and other long-term institutional players. By increasing the participation of these investors, the fund aims to reduce market volatility and promote sustained growth in the capital markets.
Moreover, the report emphasizes the importance of ensuring coordination between financial institutions and the central bank. It calls for mechanisms to link the money market with the capital market effectively, allowing the PBOC to provide low-cost liquidity to support stock purchases when needed.
“There is often a time lag between the implementation of policies aimed at increasing persistent income and expanding effective investment,” the report noted. The recommendation is to act swiftly to close this gap, ensuring that liquidity flows seamlessly from the financial system into the real economy.
Challenges and Skepticism
Despite the aggressive policy moves, China’s economic recovery faces significant challenges. Many experts are skeptical about the efficacy of the proposed measures, pointing to fundamental weaknesses in consumer demand and the ongoing property market crisis.
“The swifter move in monetary policies reflects that growth pressure has reached a tipping point,” said Gary Ng, senior economist at French investment bank Natixis. He added that the wealth effect, which boosts consumer spending when asset values rise, has been diminished over the past few years due to falling property prices and stock market fluctuations.
Moreover, some observers argue that while providing liquidity to the stock market is necessary, it is not a substitute for broader economic reforms aimed at addressing structural weaknesses. There is growing concern that China’s reliance on fiscal and monetary stimulus could lead to long-term imbalances, particularly in terms of rising government debt.
A Precarious Balance: Economic Stability and Long-Term Growth
As China navigates this uncertain economic period, the government’s focus on maintaining financial stability while stimulating growth will be critical. The proposal for a 2 trillion yuan stock market stabilization fund underscores the importance of the capital markets in China’s broader economic strategy. However, questions remain about the sustainability of these measures and whether they will be enough to restore long-term confidence.
In the meantime, the Chinese government continues to walk a tightrope—balancing the need for short-term economic stability with the longer-term goal of sustainable growth.
