(Bloomberg) -- The Chinese central bank’s program to fund loans for share buybacks has provided immediate support for stock prices but also raised questions about its long-term effectiveness and borrowers’ intrinsic value, according to traders and analysts.
After the People’s Bank of China’s announcement last week, at least 23 companies listed in Shanghai and Shenzhen, including Sinopec and Cosco Shipping Holdings Co., have collectively applied for more than 10 billion yuan of loans, according to Bloomberg calculations. Bank of China also said in a statement Monday it made loan commitments to 32 listed companies for their repurchase plans.
The program offers 300 billion yuan ($42.1 billion) in low-cost loans to 21 eligible commercial banks, which will then lend to qualified companies and shareholders, according to a PBOC statement Friday. The PBOC also is starting a swap facility that allows institutional investors to access liquidity to buy stocks.
Market watchers’ reactions underscore their wait-and-see mode given volatility in China’s markets and broader economic sluggishness despite a series of other recent government stimulus measures.
Shares of Wuhu Foresight Technology Co., a loan applicant, rose as much as the daily limit of 20% on the mainland. Shares of Cosco Shipping climbed as much as 5.5% in Hong Kong before declining later Monday.
Here’s what analysts and traders are saying:
BNP Paribas Asset Management (Chi Lo)
- It is a positive signal that Chinese authorities are getting more serious this time, which increases the likelihood of improvement in Chinese economic backdrop outlook; that should filter through to corporate earnings
- We need to see continuation of stimulus measures coming in the coming months in order to turn around the market’s expectation
- At this point, most of the investors are still “cautious”and “suspicious” about this round of stimulus measures
IG Markets Ltd. (Hebe Chen)
- Theoretically, a successful execution of a share buyback using borrowed funds from the PBOC could create a vibrant ripple effect, boosting overall market liquidity while elevating the value of stocks and the companies behind them.
- However, the key question remains: to what extent does this “artificially boosted value” in the capital markets genuinely reflect the intrinsic value of these companies amid deteriorating economic conditions?
Chanson & Co. (Shen Meng)
- The tool provides a new financing channel for listed companies to repurchase, which may have a positive effect on the secondary market in the short term
- For listed companies themselves, however, repurchase does not provide structural improvement of assets and liabilities; instead, it increases debt repayment pressure
- “It’s hard to draw positive conclusions for the long-term development of listed companies”
Huatai Securities (Shen Juan and Wang Yu)
- The tools “created by the central bank will help introduce incremental funds, boost investor confidence, enhance stability of the capital market”
- The tools can be expanded according to the situation in the future, which means that there is still a lot of policy space
Global X ETFs (Billy Leung)
- “I think I am seeing a little positive pivot to my previous view in that the recent equity swap initiatives and share buyback plans for PBOC were net positive”
- The equity swap and buybacks are likely to attract interest from sidelined buyers
- “Despite recent volatility, China remains relatively underweight in terms of positioning. I’d say the backdrop has improved, and downside risks are more contained compared to a few weeks ago”
Morgan Stanley (Laura Wang and Chloe Liu)
- Large-cap stocks with an attractive dividend yield and free cash flow yield relative to low-cost funding are better positioned to benefit from the two PBOC programs, given their heavier index weight and bigger impact on market index moves
- Announcement is taken positively, everything else being equal, and it should help stabilize market sentiment with its additional liquidity provision; it’s also a clear demonstration of support for the stock market
- Investors should monitor execution and actual buying kicking off by the end of October, as well as any signs of more forceful reflationary measures on the fiscal policy side
--With assistance from Wenshan Luo and Qianwei Zhang.
(Updates with a revised applicant total in second paragraph, BNP comments)
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