Weekly Financial Market Analysis: 14/10/2024 (China’s new monetary tools and global oil price drop)
Weekly Financial Market Analysis: Week 14/10/2024 (China’s new monetary tools and global oil price drop)
Writer: Klinsmann Lee
China has launched new funding schemes to support the stock market. [1]
Background:
China’s central bank has initiated two new schemes to support the stock market:
Swap Scheme.
Relending Scheme.
Both schemes are estimated to channel as much as 800 billion yuan to the stock market.
Swap Scheme
Funding Allocation: 500 billion yuan.
Financial institutions can obtain loans from the central bank through asset collateralisation to purchase stocks.
Assets such as Bonds, Stock ETFs, and holdings in constituents of the CSI300 Index can be exchanged for more liquid assets such as treasury bonds and central bank bills.
These more liquid assets will allow financial institutions to access funding easily when needed.
Relending Scheme
Funding Allocation: 300 billion yuan.
This scheme allows listed companies and major shareholders to access the stock market for share buy-backs and purchases.
Financial Institutions can borrow from the Central Bank at a one-year interest rate of up to 1.75%.
Listed companies and major shareholders then borrow from these financial institutions at up to 2.25% for share buy-backs and stock purchases.
Klinsmann’s Analysis:
Both schemes will have a positive impact on the stock market as these fundings will incentivise financial institutions, listed companies and major shareholders to purchase shares in the stock market.
The swap scheme also provided a form of stock market stabilisation tools. If there is a stock market panic, financial institutions can access the liquidity without having to sell shares when overall stockmarket drop.
There are further questions to consider including:
How many financial institutions will utilise the current scheme to purchase stocks in the swap scheme?
How many companies will borrow from financial institutions to repurchase stocks under the lending scheme?
The Central Bank has provided this funding but it is the financial institutions and publicly listed companies that will have to “spend” to buy stocks.
Weekly oil prices dropped on poor Q3 GDP growth by China. [2]
Background:
China’s economic growth grew at the slowest pace for Q3, the slowest since early 2023.
China is the world's top oil importer and weak economic activities signal a weak oil demand. This drives down the price of oil prices.
Brent Crude Futures closes down 7% lower for the week at US$73.06 a barrel.
West Texas Intermediate Crude was down 8% for the week at US$69.22 a barrel.
Klinsmann’s Analysis:
Unsurprisingly, China’s economic growth for Q3 has weighted negatively on oil prices as:
The slowdown may drive less demand for oil purchases.
China is a market and an important buyer of global oil.
There are also other factors contributing to how oil prices move in the long run including the electrification of transport and geopolitical risk factors.
With a fresh monetary and fiscal stimulus aimed at stabilising the economy and capital market in China, China’s economy should show signs of improvement which will be positive for oil prices in the short run.
References:
Comments