Source: Quan Shang Guo , Author: Shi Qian

In the afternoon, the Hong Kong and A-share markets collectively rose rapidly, with the Shanghai Composite Index, which had plunged 184 points in the morning, quickly recovering to within 130 points of the morning's decline. The FTSE China A50 Index futures turned positive after previously falling over 3%. The Hang Seng Tech Index fell in the morning, but quickly surged in the afternoon, rising nearly 4% at one point. The Hang Seng Index surged over 2% at one point, but later fell back again at the end of the trading day, with the technology sector dropping nearly 2%.

Most of the bond futures fell in the afternoon session. The main contract for the 30-year term narrowed its increase to 0.05%, while the main contracts for the 10-year, 5-year, and 2-year terms dropped by 0.02%, 0.12%, and 0.06% respectively.

Just before the midday trading session, a major news announcement was made. The State Council Information Office will hold a press conference at 10:00 am on Saturday, October 12, 2024. The Minister of Finance, Lan Fo'an, will introduce the relevant information on "intensifying the countercyclical adjustment of fiscal policies and promoting high-quality economic development", and will answer questions from reporters. This may reinvigorate the market's bullish sentiment.

Just now, the central bank announced that the People's Bank of China and the Ministry of Finance jointly held their first formal meeting. The joint working group of the central bank and the Ministry of Finance held its first formal meeting, fully acknowledging the close cooperation between the two sides in the trading of central bank bonds. They established the operational mechanism of the working group and exchanged views on the operation of the bond market. Both parties unanimously agreed that central bank bond trading is an important means to enrich the toolbox of monetary policy and strengthen liquidity management.

The central bank stated that in the next step, it will coordinate development and security, continue to strengthen policy coordination, continuously optimize relevant institutional arrangements, regulate while maintaining the stable development of the bond market, and provide a suitable market environment for central bank bond trading operations.

Sudden abnormal movements!

In the afternoon, there was a significant abnormal movement in the A-share market. The sse composite index, which fell sharply in the morning, quickly narrowed its decline, and the chinext price index also rapidly narrowed its decline to 4.4%. The brokerage sector surged again in the afternoon, with East Money Information's turnover exceeding 76 billion yuan, currently up over 15%.

Subsequently, A-shares and Hong Kong chip stocks shined. Semiconductor Manufacturing International Corporation's A-shares hit the daily 20% limit in the afternoon, with a turnover of 23.8 billion yuan. A-shares such as HG Semi, HiSilicon, Huahai Qingsheng, Cambricon, Longji Guan, and Hubei Dinglong reached historical highs. Hong Kong's semiconductor sector continued to rise in the afternoon, with HG Semi up over 30%, Semiconductor Manufacturing International Corporation up over 10%, and Solomon Systech, Hua Hong Semi, and others following suit.

The Hang Seng Tech Index rose more than 2%, after initially dropping more than 4%. The Hang Seng Index rose more than 1%, after initially dropping more than 3%. Offshore RMB against the US dollar rose by over 100 points in the short term, briefly reaching 7.0593.

Meanwhile, there was also unusual activity in the ​​bonds market. Most ​​bond futures fell in the afternoon, with the main 30-year contract narrowing its gains to 0.05%, the main 10-year contract falling by 0.02%, the main 5-year contract dropping by 0.12%, and the main 2-year contract falling by 0.06%. Subsequently, all main bond futures contracts turned green, with the yield on the active 10-year bond rising by nearly 1 basis point to 2.199%.

On the news front, the State Council Information Office will hold a press conference at 10:00 am on Saturday, October 12, 2024, where Minister of Finance Lan Fo'an will introduce the relevant situations regarding 'increasing the intensity of countercyclical adjustment of fiscal policies and promoting high-quality economic development', and answer questions from reporters.

How will the fiscal sector strengthen its efforts?

So, how will the fiscal sector strengthen its efforts? Currently, the market generally expects the release of a trillion-level special national debt plan. The scale and utilization of these funds will also influence the subsequent direction of the economy and the market.

China International Capital Corporation released research reports pointing out that in the second half of the financial cycle, there is a prominent contradiction of insufficient demand. At the end of September this year, the State Council Information Office issued several policies, and subsequent high-level meetings further signaled positive policies, with a positive market response. There is still room for monetary policy to be accommodative, but given the significant deleveraging in the private sector, the necessity for fiscal reinforcement has significantly increased.

While strictly regulating the addition of new debts, accelerating the replacement of local existing debts, and solving the issue of corporate debt defaults are conducive to reducing the burden on relevant entities and stimulating economic vitality. The Third Plenary Session of the 20th Party Central Committee's "Decision" pointed out that "protecting and improving people's livelihoods during development is a significant task of China's modernization."

China International Capital Corporation believes that, against the backdrop of a reduction in traditional infrastructure space, shifting the focus of fiscal expenditure from infrastructure investment (hard infrastructure) to people's livelihoods (soft infrastructure) is helpful for enhancing the quality and efficiency of fiscal measures. People's livelihoods cover a wide range, mainly focusing on education, health, and social security. One scenario considers the situation during the transition to the stage of medium-developed countries like the United States and South Korea, and the so-called "Wagner acceleration period." Another scenario is based on fitting data from approximately 30 economies, with some differences in the results between the two scenarios, but overall, there is still ample space for "soft infrastructure." Different sectors of people's livelihood expenditures show significant differences in the multiplier effect on economic growth, with the overall short-term multiplier of the three main people's livelihood sectors possibly ranging from 0.7 to 0.9, while the long-term multiplier is greater than 1. Specifically, the short-term multiplier for education is greater than 1, while it is less than 1 for health and social security, possibly due to the former's more significant expenditure rigidity.

Since late September, Incremental monetary policies and real estate policies have been intensively released. As a key measure to expand total demand countercyclically, incremental fiscal policies have become the market's focus. Local fiscal revenue and expenditure in the first eight months of the year have all been below 0.5% year-on-year. Increasing the scale of national bonds could be used for transferring payments to local governments or supporting expenditures on people's livelihood and social security, easing the tight fiscal pressure on local governments. Assuming a general budget revenue execution rate of 96%, an additional funding of approximately 82.86 billion yuan is needed to reach the initial year's budget level on the expenditure side. Assuming a government fund revenue budget execution rate of around 80%, another approximately 1.4 trillion yuan is required to match the initial year's budget level on the expenditure side. To bring fiscal expenditure back to pre-pandemic levels, the required funding would be even higher. The scale and direction of incremental fiscal measures will be critical factors affecting market expectations in October.

Editor/Lambor