China: Equity downside cushioned by policy support – Societe Generale

Expanded use of the SFISF is among China’s latest measures to support equities. Societe Generale’s Michelle Lam examines the policy response to the recent correction, including cheaper, more permanent buyback relending and informal IPO restrictions. The report concludes that these steps chiefly strengthen the policy floor and contain downside risk, while offering little impetus for sustained gains in China equities.

China equities: policy floor strengthened, upside limited

"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.)