(Bloomberg) -- China should issue 2 trillion yuan ($281 billion) of special government bonds to help create a market stabilization fund, according to a top government-linked think tank.
The fund would promote market stability through the buying and selling of blue-chip stocks and exchange-traded funds, Chinese media outlet the Paper reported, citing a release from the Institute of Finance & Banking at the Chinese Academy of Social Sciences. That think tank is affiliated with the State Council, China’s cabinet.
Chinese authorities have been considering such a fund as part of a stimulus blitz that kicked off in late September to boost equities and the economy. But there have been few details released on the initiative.
The People’s Bank of China separately has launched other programs — a specialized re-lending facility to help listed companies and major shareholders buy back shares, as well as a swap facility that allows institutional investors to access liquidity from the PBOC to purchase stocks.
Chinese equities have lost some steam recently, after staging a historic rally driven by the stimulus measures. The CSI 300 Index is down 7% from this month’s high, trimming its rebound from a September low to about 25%. The focus now is on a huddle of top lawmakers in the coming weeks that’s expected to rubber stamp trillions of dollars in government spending.
The International Monetary Fund on Tuesday cut its China growth forecast for this year to 4.8% from 5% previously, citing weakness in the real estate sector and low consumer confidence, while maintaining the 2025 forecast at 4.5%.
IMF Chief Economist Pierre-Olivier Gourinchas said that while China’s recent measures go in the right direction, those announced by the PBOC last month don’t do enough to lift growth in a material way, and more recent measures from the Ministry of Finance aren’t yet incorporated into the agency’s forecast.
Separately, Evercore ISI estimated China could unleash as much as 11 trillion yuan in fiscal stimulus, should Republican nominee Donald Trump win the US presidential election next month.
“Beijing is likely to roll out a plan for 1-2 trillion yuan of ultra-long special sovereign bonds to mitigate any possible sentiment shock in the market from a second Trump presidency,” said Neo Wang, the organization’s New York-based managing director for China research.
Beijing may also sell 1 trillion yuan of special sovereign bonds to help banks with capital replenishment and allow local governments to raise their debt ceiling by 6-8 trillion yuan under a three-year swap plan, according to Wang.
Meanwhile, the state-linked think tank called for authorities to publicly reveal the inflation indicators and targets that China’s central bank focuses on. It also pressed for credible PBOC policy operations to guide the market’s long-term inflation expectations, so that they’re anchored at a reasonable level, according to the report.
That call mirrors the approach of many developed-nation central banks, which emphasize the importance of anchoring long-term expectations for consumer prices. That can help avert both a deflationary mindset from setting in when prices fall, or an inflationary spiral when the cost of living is surging.
If monetary policy targets inflation at 2% and policymakers pledged to keep easing until the target is reached, that would the central bank play a role in boosting market confidence and effectively promoting economic recovery, the report said.
--With assistance from Jenni Marsh and Eric Martin.
(Updates with IMF’s revised growth forecast from 6th paragraph)
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