China's central bank stabilises stock market with targeted monetary policy

Our briefing as of Tuesday, 21 January, 2025.

Jan 21, 2025

Our briefing on critical economic and financial developments in China as of Tuesday, 21 January, 2025:

The Chinese central bank will expand the use of a new re-loan facility to fund share market investment.
China’s policymakers managed to engineer an economic recovery in the final quarter of last year, to satisfy the full-year GDP growth target of 5%. Luo Zhiheng identifies three key supports and three key restraints on China’s economic growth.

The central bank and the China Securities Regulatory Commission (CSRC) just convened a joint meeting on the use of central bank re-loans to fund share buybacks and increases in shareholdings.

The meeting called for the expanded use of this policy tool to stabilise capital markets in 2025.

The share buyback re-loan was first established as a new policy tool by the Chinese central bank in October 2024.

The tool was launched in collaboration with CSRC and the National Financial Regulatory Administration (NFRA) - China’s super-regulator for the financial sector.

The re-loan works by “guiding Chinese financial institutions to provide loans to listed companies and their key shareholders,” for the express and exclusive purpose of either buying back shares or increasing their holdings of shares in such companies.

While it may look to many to be manipulation of market prices by policymakers, Chinese officials insist the loans are “a tool to manage the market capitalisation of listed companies which is in general use internationally.”

The central bank is “encouraging banks to make loans to fully satisfy the financing needs of listed companies for the management of their market capitalisation.”

China wants capital markets to play a bigger role

China is currently seeking to increase the role of capital markets in resource allocation and corporate financing.

For this reason, it’s imperative to ensure that share prices remain comparatively healthy and stable.

While China’s share prices enjoyed a spike after Beijing unveiled stimulus signals in the final quarter of 2025, the gains were short-lived.

After tapping a peak of 3674 points on 8 October 2024, the Shanghai stock index dropped to a recent new low of 3168 on 10 January 2025.

According to Chinese officials, the re-loans have already had the effect of “maintaining the stable operation of capital markets, and spurring market confidence.”

“Capital markets are a weather vane of confidence, and a key channel for the allocation of financial resources that are closely tied to economic developments,” officials have said.

As is par for the course with China’s economy, policymakers say they are keeping a close eye on developments and “continually optimising policy tools.”

These include reducing the ratio for borrower self-owned funds all the way down to 10%, and extending the maximum loan maturity to three years.

“The central bank will further improve the design and systemic arrangements for these tools based on the initial round of practice and experience,” said Zou Lan (邹澜), head of the central bank’s monetary policy department.

“We will continually increase the convenience of usage of these tools, so that relevant enterprises and institutions can obtain adequate funds to increase their investments at any time based on their needs.”

How China’s economy managed to stage a last-minute recovery in the final quarter of 2024

After steadily declining for three straight quarters, China’s GDP growth bounced back to an annual peak in Q4, enabling it to meet the full-year target of 5%.

Official figures indicate that China’s GDP was 134.9 trillion yuan (approx. USD$18.44 trillion) in 2024. This marks the first year that Chinese economic output has breached the 130 trillion yuan threshold, after posting YoY growth of 5%.

China’s economic growth figures followed a “U-shaped” pattern in 2024. They steadily declined for the first three quarters (5.3%, 4.7% and 4.6%), before bouncing back in the final quarter to post the highest reading for the year (5.4%).

A key driver of the fourth quarter’s outperformance was the slew of expansionary quantitative policies unveiled by China’s Politburo on 26 September, which served to spur market confidence.

This helped to revive the share market, driving a recovery in the balance sheets of households and enterprises and making them more active.

Support factors for growth

Luo Zhiheng (罗志恒), chief macro-economic researcher at Yuekai Securities, highlights three key supports for China’s economy in 2024.

The first key support was exports outperforming expectations. Goods and services exports saw YoY growth of 5.9%, as compared to -4.5% in 2023.

Net exports drove 1.5% of China’s YoY rise in GDP, as compared to a figure of -0.6% in 2023.

The second key support was China’s stimulus policy for subsidising capital goods upgrades, which drove growth in manufacturing investment.

Equipment and tool purchases and manufacturing sector investment grew 15.7% and 9.2% in 2024, as compared to 6.6% and 6.5% in 2023.

The third key support was the Chinese central government taking out more debt to support infrastructure investment.

Its investment in rail transportation and water management surged 13.5% and 41.7% YoY in 2024.

This helped to drive a 9.2% rise in broad infrastructure investment in China last year.

Restraints on China’s growth

Luo Zhiheng also identifies three major brakes on China’s economic growth last year.

The first was weak consumption, with 2024 consumer good retail sales growing just 3.5% YoY, as compared to 8% before the pandemic in 2019.

China’s average consumption inclination rate (per capita consumption expenditures/ per capita disposable income) was 68.3% in 2024, as compared to 70.1% in 2019.

The second brake on China’s economic growth last year was a slide in local government infrastructure investment, due to efforts to deleverage and deal with hidden regional debt risk.

Local government-led roadway investment and public management investment fell -1.1% and -3.1% YoY respectively in 2024.

The third brake on China’s economic growth last year was the sickly state of the real estate sector.

Commercial housing sales in terms of floor space fell -12.9%, as well as -17.1% in terms of sales value.

Real estate investment fell -10.6%, further expanding its decline compared to the drop posted in 2023.