More positive policies predicted to boost market, economy

In a follow-up to the set of measures announced over the weekend to revive China's capital market, analysts are expecting more positive policies that will further boost the market and the economy.

In a bid to stimulate the capital market and bolster investor confidence, the Ministry of Finance and the State Taxation Administration of China announced a reduction in stamp duty on securities transactions. The move, which took effect from Monday, is expected to have a positive impact on the market and pave the way for further positive policies.

Historically, reductions in stamp duty rate have yielded positive outcomes, and this recent adjustment is no exception.

Following the announcement, market sentiment experienced a significant boost. The combined turnover on the Shanghai and Shenzhen stock exchanges exceeded 1.1 trillion yuan (US$150.92 billion) on the first trading day after the announcement, and it surpassed 1 trillion yuan again on the second day. The Shanghai Composite Index and the Shenzhen Component Index both saw bigger gains on Tuesday, up 1.2 percent and 2.17 percent, respectively.

The stamp duty cut comes at a crucial time for China's economy. Against the backdrop of significant fiscal pressures, the introduction of this policy demonstrates the government's clear intention to reduce fiscal revenue while injecting vitality into the market.

China currently boasts over 220 million individual investors, accounting for 99.76 percent of the total market participants. Halving the stamp duty will directly benefit a wide range of investors, particularly small and medium-sized ones, which is expected to increase their willingness to engage in trading activities.

Zhao Xijun, co-chairman of the China Capital Market Research Institute at Renmin University of China, believed that lowering the stamp duty is beneficial in ensuring that the tax reduction policy benefits small and medium-sized investors. This policy direction aligns with the goal of benefiting the majority of investors in the capital market where small and medium-sized investors play a dominant role.

In addition to the stamp duty reduction, the China Securities Regulatory Commission has also released a series of policy measures. These measures, including optimizing initial public offering and refinancing supervision arrangements, further regulating share reduction behavior, and adjusting the financing margin ratio of stock exchanges, aim to create a more favorable investment and financing cycle and inject more confidence into the market.

The reduction of the minimum ratio of margin financing from 100 percent to 80 percent, for example, will come into effect after the closing bell on September 8. Following the adjustment, the leverage ratio for margin trading will be increased from 1 time to 1.25 times. This is the first time that the securities exchanges have lowered the margin requirement, which can be beneficial in increasing market liquidity and boosting trading sentiment.

Meng Qingshu, a researcher at China Securities, pointed out that although the government has implemented similar policies multiple times to cope with market volatility, they often focused on short-term adjustments, such as interest rate cuts and relaxation of restrictions, which had temporary effects. In contrast, the current policy package covers multiple aspects, which not only includes short-term stimulating measures but also encompasses comprehensive long-term policies.

This indicates that the government aims to promote the linkage between the financial market and the real economy through systematic adjustments and optimizations. This will fundamentally enhance market stability and sustainability, and better empower the robust development of the real economy, Meng said.

China Galaxy Securities said in a note that this package of policies was mainly aimed at effectively utilizing existing market funds to inject vitality into the market and boost investor confidence, and complement other policies in order to restore the overall macroeconomic endogenous growth momentum, especially in the current context of limited incremental funds.

"It is worth noting that the current policies primarily target existing funds, and it is expected that more policies will be introduced in the future to attract new funds," the note added.

On further supportive measures for the Chinese economy, Wang Tao, chief China economist of UBS, said it is foreseeable that fiscal policies will be strengthened.

Meanwhile, following recent signals from the central government to prop up the slumping property market, local governments are likely to announce supportive measures, such as a reduction in down payments for second homes, as seen in cities like Nanchang in Jiangxi Province, and further adjustments in mortgage interest rates, Wang predicted.

These policies are reasonably expected to have an impact if they are implemented collectively.