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In recent days, the spotlight has been firmly on the central bank's press conference, an event that garnered significant attention from various sectors. Industry professionals were keenly awaiting the announcement, hoping to glean positive news that could potentially benefit their respective fields. As a result, the Shanghai Composite Index soared by 5%, signaling a promising response to the US Federal Reserve’s interest rate cuts, which appear to be yielding early positive results.

In the wake of this bullish surge, it is likely that the media will no longer attempt to draw parallels between China's current economic situation and Japan's so-called "lost decade," a narrative often cited to underscore economic stagnation.

The central bank's announcement included favorable policies aimed particularly at the real estate sector, along with several unexpected measures indicating a substantial shift in priorities for future monetary policies. These transformations prompt speculation about whether the dynamics regarding the reserves of the Chinese yuan will also undergo significant changes.

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A Surge of 2.4 Trillion Yuan into the Stock Market

Regarding the aforementioned economic stimulus measures, observers largely felt they were anticipated developments. The cushion created by the Federal Reserve's decision to lower interest rates has afforded China greater latitude in its monetary policy direction. On one hand, the pressure of potential yuan appreciation could compel authorities to enact additional rate cuts and reserve requirement ratio adjustments. On the other hand, the domestic economy continues to experience substantial stress resulting from the U.S. Federal Reserve's rate hikes.

 

Therefore, while the measures introduced at today’s central bank conference were largely expected, what many realized in the immediate aftermath was the central bank’s implicit encouragement of the Chinese stock market’s growth.

For instance, economist Hong Hao articulated this sentiment bluntly, stating, “First come 500 billion, then another 500 billion, and maybe a third 500 billion.” His message was clear: the central bank is effectively urging investors to buy stocks.

 

However, official interpretations of these announcements provide a more nuanced analysis:

The central bank has launched structural monetary policy tools to support capital markets. Among these tools is the facilitation of swaps for securities, funds, and insurance companies. This measure allows qualifying entities to use their own bonds, stock ETFs, and shares from the CSI 300 index as collateral to access highly liquid assets such as government bonds or central bank bills. This policy is poised to significantly enhance the ability of involved institutions to acquire capital and increase their stock holdings. It is worth noting that the funds obtained through this instrument are specifically designated for investment in the stock market.

It is crucial to remember this stipulation, as it suggests that around 1.5 trillion yuan is exclusively earmarked for stock market investments.

Secondly, the new initiative encourages listed companies to pursue further share buybacks via loans. This aims to guide commercial banks in providing financing to listed firms and their major shareholders at a staggering 100% public funding support rate, with an unbelievably low interest rate of just 2.25%. The initial tranche of this funding is set at 300 billion yuan, and depending on its application, this could potentially scale up to 900 billion yuan.

When combined, these two funding streams represent an influx of 2.4 trillion yuan that could directly fuel the stock market.

In the realm of financial instruments, this translates into stock ETFs, leveraging the CSI 300 stocks for enhanced equity purchases.

 

As soon as these policies were unveiled, some analysts began outlining strategies. For example, currently, several listed companies offer dividend yields between 4% to 5%. By borrowing funds at the 2.25% interest rate to repurchase shares, businesses could exploit an annual spread of 2% to 2.5% through dividend income.

If you were the CEO of a listed company, what decision would you make?

We should recall the period of leveraged market speculation during 2015, when social capital fueled a rapid and superficial bull market, culminating in its downfall due to currency fluctuations and substantial capital outflows.

Now, however, the landscape is changing; listed companies and financial institutions have become the primary players engaging in leverage.

Could this point toward a resurgence of the A-share bull market?

Learning from the Experience of U.S. Markets' Decade of Prosperity

The ascent of the stock market hinges upon a simple premise: creating liquidity to purchase stocks. Yet, there lies a fundamental question.

Besides the Federal Reserve’s continued quantitative easing injecting liquidity into the economy, how does one ensure that capital flows into the desired avenues?

Perhaps a retrospective examination of the history of the U.S. stock market will provide insight.

After the bursting of the dot-com bubble in 2000, the Nasdaq index languished in a bear market for ten years; meanwhile, the Federal Reserve's money-printing operations never faltered.

The crux of the matter is that the Federal Reserve skillfully channeled liquidity primarily into the U.S. housing market.

 

When “dreams” and “down payments” were both encapsulated in a single piece of legislation, the Federal Reserve adopted interest rate cuts to foster a conducive monetary environment.

Consequently, individuals in search of hope and prosperity shifted away from internet ventures and flocked to the U.S. real estate market.

Thus began a period of housing market prosperity that lasted until the 2008 subprime mortgage crisis shattered these dreams.

Throughout those tumultuous years, the Nasdaq index appeared stagnant, as it struggled to attract capital diverted from the real estate market. Eventually, in the wake of the subprime crisis, it relinquished all its gains.

 

Following this, in the post-2009 era, then-Federal Reserve Chair Ben Bernanke rescued the U.S. economy from the brink of recession with quantitative easing (QE) and zero interest rates.

Bernanke afforded the Federal Reserve and the U.S. government a ’safety net’ under the stock market, simultaneously utilizing low rates and increased liquidity to galvanize economic stimulation.

For American companies, the historically low costs of bond financing made borrowing to repurchase shares a tantalizing option.

This strategy benefited companies in two significant ways:

As this unfolded, the scale of U.S. corporate debt skyrocketed. By the end of 2009, overall corporate bonds in the U.S. amounted to nearly $6 trillion, but by 2023, this figure had surged to $10.9 trillion.

Corporate debt had nearly doubled.

Many businesses, though their profits became stagnant, leveraged bond financing to repurchase shares, boosting earnings per share (EPS), which became a crucial source of wealth generation.

 

Having explored these historical precedents in the U.S. markets, one might ponder if the current measures introduced by the three major financial powerhouses are not precisely targeted.

Now that the focus has shifted from real estate to enterprise leverage, and residential leverage hits its limits, why is the central bank placing increasing importance on capital markets? Is it merely to spur a bull market?

A Prelude to the Yuan's Reinternationalization

According to a report from the Wall Street Journal dated September 21, cooperation between Saudi Arabia and China’s financial markets is intensifying. Saudi Arabia is set to issue its inaugural ETF focused on stocks in Hong Kong, having received approval from the Saudi Capital Market Authority.

Thereafter, the yuan exchanged for oil sales can be directly invested into Chinese enterprises, beginning with Hong Kong-listed companies, eventually growing its presence in A-shares.

 

Does this not feel eerily familiar?

When the oil dollar was at its peak, the dollars earned by Saudi Arabia primarily fueled investments in the U.S. stock market and the acquisition of U.S. Treasury bonds. In other words, Saudi capital was a cornerstone of the U.S. stock market's decade-long bull run.

Currently, the global financial landscape is in a state of flux, jaded by the gradual disintegration of the old order, as a fresh one takes shape. Over the past two years, the international standing of the yuan has seen notable enhancements.

 

For the yuan's market share to expand again, it necessitates the establishment of investment venues that facilitate foreign capital, both for speculative and risk-averse ventures.

Otherwise, holding yuan assets only results in depreciation, making gold a more attractive option for safekeeping.

The establishment of viable investment pathways for the yuan, alongside opportunities that provide favorable returns, is the crux of the matter.

 

Thus, the stock market emerges as the most favorable reservoir for accommodating overseas investment in the yuan.

In other words, the real estate market can no longer serve as the new collateral sink for currency. Despite the introduction of various supportive policies for the real estate market today, they pale in comparison to the direct injection of 1.5 trillion yuan into the stock market.

Real estate, at its current scale, is incapable of stimulating further price escalations; conversely, the 1.5 trillion yuan infusion into the stock market can invigorate the A-share market, fostering a robust capacity for generating profits and attracting investment.