Are Incremental Policies Fueling the Stock Market's Takeoff?

In the past week, the stock market exhibited a prevailing state of volatility, reminiscent of a pendulum swinging back and forth. However, on Friday, a series of announcements revitalized investor sentiment, leading to a gradual recovery of stock indices. The official release of documents regarding stock buybacks and the special relending policy for increased holdings, in conjunction with the potential reduction of the reserve requirement ratio (RRR) by 0.25 to 0.5 percentage points, fueled optimism among investors. Furthermore, 20 institutions were approved for a swap facility worth over 2 billion yuan, which also contributed to the positive momentum.

The latter part of Friday’s trading saw a surge in technology sectors, particularly the semiconductor industry, as President Xi Jinping's remarks about pushing forward modernization through technology resonated throughout the market. This inspired a broad uptick across tech stocks, resulting in trading volume soaring back to 2 trillion yuan, signifying a significant increase in market activity. By the end of Friday, the Shanghai Composite Index closed at 3261.56 points, reflecting a weekly gain of 1.36%, while the STAR Market 50 Index rose by an impressive 8.87% to reach 978.66 points.

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Analyzing sector performances, technology emerged as the clear winner, with software, semiconductors, and internet sectors posting impressive gains of 12.76%, 11.61%, and 8.64% respectively. In contrast, the traditional industries, particularly breweries, shipbuilding, and the food and beverage sector, experienced downturns with declines of 3.55%, 2.98%, and 2.05%. This divergence illustrates how tech stocks are driven by different economic dynamics compared to traditional industries, which are more closely tied to macroeconomic trends.

Turning to fundamental analysis, People's Bank of China (PBOC) Governor Pan Gongsheng hinted at a potential targeted RRR reduction of 25-50 basis points before the year concludes, while the upcoming Loan Prime Rate (LPR) announcement on October 21 is expected to yield a similar decrease of 20-25 basis points. The recent package of incremental policies has already led to a 20 basis point reduction in the seven-day reverse repurchase rate. This rate currently acts as a benchmark for policy rates, and such adjustments are likely to influence the LPR rates correspondingly; if banks are willing to offer more favorable spreads, the LPR could see a reduction of up to 25 basis points.

In addition to this, the PBOC introduced two new instruments over the weekend aimed at bolstering the market. The swap facility for securities, funds, and insurance companies officially commenced operations on October 18, with approval given to 17 securities firms and 3 publicly offered fund companies to engage, collectively seeking over 200 billion yuan in allocated limits. This facility allows financial institutions to pledge various asset classes, including bonds, ETFs, and stocks, in exchange for central bank bills and government bonds, which can then be monetized in the market for targeted investment in equities.

The second tool, centered on "stock buyback and increased holdings through relending," sees the central bank providing funds to commercial banks, who in turn lend to listed companies or significant shareholders specifically for the purpose of stock repurchases, with lending rates capped at an attractive 2.25%. Both measures, initially proposed during a late September PBOC press conference, have been rapidly implemented, significantly boosting market confidence. Investors are eagerly awaiting the anticipated debt restructuring scale, which could be announced as early as the end of this month or by early November, corresponding with an optimistic outlook regarding achieving a targeted economic growth of around 5% for the year.

On the overseas front, the U.S. also displayed resilience with retail sales rising unexpectedly in September, further indicating a lack of significant downturns in the economy. The retail sales rose by 0.4% month-over-month, surpassing the 0.3% expectation and previous readings. Although year-over-year growth dipped to 1.7%, the lowest since January 2024, most product categories experienced upward trends, marking grocery stores as the leaders in growth. Meanwhile, fuel sales declined due to lower oil prices, yet expenditures in restaurants and bars peaked at their highest levels in a year, indicating strong consumer spending that underpins the robust American economic landscape.

As for future market forecasts, short-term volatility may intensify, yet the medium-term outlook remains positive. Recent policy shifts demonstrate a clear commitment from central authorities to bolster economic growth. The emphasis on return on investment and plans for long-term fund inflows into the market signals a nurturing approach towards capital markets. The current investment landscape is experiencing marginal improvements across fundamental expectations, regulatory frameworks, and funding conditions, presenting an attractive valuation level even after a historical swift rebound. While the market now enters its first adjustment phase following rapid growth, investor sentiment remains buoyant, potentially amplifying volatility. The substantial gain on Friday reignited investor enthusiasm, with more traders likely entering the market, escalating fluctuations. A-shares have garnered immense attention; however, investors should proceed with caution, as market dynamics can be unpredictable.