Boosting investor confidence: China's recent key policy updates
Synopsis of key policy initiatives in real estate sector, healthcare sector, and the capital market
During the July Politburo meeting, China indicated a new priority: "To catalyze the capital market and boost investor confidence." Notably, this particular guideline was not mentioned in previous discussions, indicating a deliberate shift towards promoting investment.
Several policies and stimulus measures have been recently introduced. In this post, we've streamlined the latest policy and stimulus updates for you. Dive into this post for a concise overview of the most impactful changes and their implications for China's equities.
Real Estate
The Politburo meeting on July 24, 2023, emphasized the necessity of adjusting real estate policies to align with the evolving supply and demand dynamics in the Chinese real estate market. As part of this, the meeting decided to remove the "no speculation in real estate" phrase that had been in effect since 2016.
“Recognizing Property, Not Loans”: The "recognize property, not loans" policy, introduced on August 25, allows residents without a full property under their name locally to be treated as first-time homebuyers, regardless of previous mortgage history. This policy aims to encourage home purchases.
In first-tier cities, the policy of "recognize property, not loans" is being fully implemented, surpassing expectations and greatly boosting market sentiment. As an example, in Beijing, the down payment ratio for homebuyers without a property but with a loan record will be reduced from 60% (for ordinary homes) to 35%. With a total housing price of 4 million yuan, the down payment for ordinary homes will be reduced by 1 million yuan. Additionally, the mortgage interest rate will be lowered from 5.25% to 4.75%, resulting in a decrease of 50 basis points. For a loan of 3 million yuan, calculated based on a 25-year equal principal and interest payment plan, the interest will be reduced by 262,100 yuan. This significant reduction in the threshold and cost of home buying is expected to stimulate demand from individuals without a property but with a loan record, as well as those looking to sell and buy homes simultaneously. [source]
According to data from BigOne Lab (as of September 17), in the week following the introduction of the new "recognizing property, not loans" policy in first-tier cities, there was a continued increase in the number of property viewings and transactions of the existing homes.
Lowering down payments: On August 31, the People's Bank of China and the National Administration of Financial Regulation jointly issued a notice regarding the adjustment and optimization of differentiated housing loan policies. For residents purchasing commercial housing through loans, the minimum down payment ratio for the first home is set at no less than 20%, and for the second home, it's set at no less than 30%.
Before this regulation, the minimum down payment ratios for purchasing commercial housing varied by region. In restricted purchase areas, the rates were 30% for the first home and 40% for the second, whereas in non-restricted areas, they were 20% for the first home and 30% for the second. With the new rule, there's no differentiation between restricted and non-restricted areas, effectively lowering the barrier to purchasing a home. It's anticipated that second-tier cities and below will soon adjust their down payment ratios to these new minimum levels. Whether top-tier cities will follow suit remains to be seen. [source]
Reducing interest rates: Starting from September 25, 2023, borrowers with first home loans have the option to request their financial institutions to replace them with new loans dedicated solely to repaying the existing ones. This year, the medium-term lending facility (MLF) and loan prime rates (LPR), which serve as benchmark rates for setting mortgage rates, have experienced reductions. The current 1-year LPR stands at 3.45%, while the 5-year LPR is 4.2%.
Healthcare
China has launched a rigorous anti-corruption campaign in its pharmaceutical sector, which has had significant effects on stock markets and IPOs. In our previous post, we discussed the market implications of this campaign. The scope of the campaign is unprecedented, as it specifically targets high-ranking hospital officials and doctors. Its objective is to combat corruption, kickbacks, and inflated medical expenses. While there may be short-term pressure for pharmaceutical companies to recover profits, there is also the potential for long-term benefits in terms of innovation.
Anti-corruption crackdown rocks China's healthcare: implications & market impact
The National Health Commission has recently rolled out guidelines to shield frontline healthcare workers from undue stress. These guidelines set definitive benchmarks for self-evaluation and remedial measures. For instance, they aim to:
Distinguish between genuine earnings for healthcare professionals and illicit activities such as commercial bribery and kickbacks.
Guarantee uninterrupted procurement of medications, equipment, and consumables by hospitals through authorized channels.
Advocate for healthcare professionals to participate in credible academic conferences (many of which were previously delayed or canceled) without any discouragement.
Capital Market
Linking dividends and share reduction: The China Securities Regulatory Commission (CSRC) plans to revise a series of rules to improve cash dividend regulation and promote dividend distribution by companies.
The CSRC has recently implemented a policy linking dividends and share reduction, preventing controlling shareholders from reducing their holdings in companies that have not distributed cash dividends in the last three years or whose cumulative cash dividends are below 30% of the average annual net profit for the past three years.
This is the first time in China that, in order for a controlling shareholder to sell down shares, they must not only be profitable but also distribute a portion of their profits to shareholders as dividends. For a detailed discussion on the significance of linking dividends and share reduction, listen to our podcast:
CSRC has also enhanced information disclosure regulation, streamlined the dividend distribution procedures, created incentives for high dividend companies, and introduced measures to prevent financial fraud and ensure genuine company performance by constraining companies from distributing dividends beyond their capacity.
Experts generally believe that cash dividends should be primarily based on company autonomy rather than being enforced. Dividend distribution should consider multiple factors, including profit, cash flow, debt, growth stage, and corporate goals. However, regulators should play a more active role in guiding companies with governance issues and promoting a mature investment culture to support sustainable capital market development. [source]
Adjustments to Insurance Investment Risk Factors: The China Banking and Insurance Regulatory Commission (CBIRC) released a notice on September 10, 2023, regarding the optimization of regulatory standards for insurance companies' solvency. This adjustment aims to facilitate insurance companies' increased market investments, further enhancing their support for the real economy and improving service efficiency. These changes mean:
Insurance companies can now invest more easily in popular stock markets, like the Shanghai-Shenzhen 300 and the Star Market, as they need to set aside less money against potential risks.
The companies are encouraged to put money in up-and-coming industries.
Companies must regularly show how their investments are doing over a 3-year period, encouraging a focus on long-term growth.
With these changes, insurance companies will have more flexibility in how they invest, potentially freeing up a huge amount (over 200 billion yuan) for stock investments. This could lead to new investment opportunities.
I always found it interesting that China allows hedge funds, dividends, insurance companies, and real estate speculation like the US does, but with far more regulation. China's laws aren't written by corporate-sponsored think tanks. I wonder if anyone has broken down the key policy differences between how the Chinese system differs from that of the US.