China: Policy support limits equity downside – Societe Generale

Societe Generale’s Michelle Lam assesses recent Chinese policy moves to support China equities following the latest correction. She highlights expanded use of the SFISF, cheaper and more permanent buyback relending, and informal IPO curbs. The report argues these measures mainly reinforce a policy floor and limit downside, but do little to generate sustained upside for China equities.

Policy support reinforces market floor

"Chinese policymakers have stepped up efforts to stabilise the stock market following the recent correction. Taken together, the latest measures could provide an additional RMB100bn through the Securities, Funds and Insurance Companies Swap Facility (SFISF), alongside potentially RMB200bn or more of additional demand for share-buyback and shareholding-increase loans at a cheaper interest rate."

"The latest measures provide additional liquidity and help prevent a correction from becoming self-reinforcing. However, the experience since these facilities were introduced in late 2024 suggests they have not been very effective. This is perhaps why equity market reaction remains underwhelming."

"Second, liquidity is not the main constraint on Chinese equities. Lower financing costs can make buying shares more attractive, but they cannot fully offset concerns over earnings growth, margin compression, subdued domestic demand and broader macro uncertainty. Nor can they by themselves resolve the underlying profitability challenges facing parts of the corporate sector."

"The direction is clear: the authorities want to strengthen the policy floor under the market. But the measures are more effective at limiting downside than generating sustained upside."

"Their strongest effect may therefore come through signalling: repeated intervention demonstrates policymakers' willingness to step in when markets come under significant pressure, strengthening investors' perception of a policy floor."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)