The State Council Information Office held a press conference at 10:00 am on October 12 to introduce the relevant situation of "increasing the intensity of fiscal policy countercyclical adjustment and promoting high-quality economic development" by Minister of Finance Lian Fa'an, and answered questions from reporters. At the meeting, the Ministry of Finance announced the research to expand the use of special bonds to support the acquisition of existing commercial housing for affordable housing; issuing special national bonds to support large state-owned commercial banks to supplement core Tier 1 capital; a one-time increase in a large-scale debt ceiling, replacing local government existing hidden debts and a series of incremental policies.

Market analysis believes that this press conference did not provide detailed information on the specific amount of fiscal policy arrangements, but the statement "the central government still has a large space for borrowing and deficit enhancement" fully demonstrates the strong determination and ability of the finance to achieve revenue and expenditure balance, complete the annual budget target, and support the stable and positive development of the economy.

With the gradual progress of related procedures, it is still expected that there will be further efforts in fiscal policies, and it is still worth the market's continuous attention to determine the space for efforts. With the expectation of continued short-term policy efforts, it is expected that long-term interest rates will remain in a fluctuating trend. The 10-year national bonds may run in the range of 2.0%-2.2%.

"As incremental fiscal policies are gradually implemented, market risk appetite will significantly increase, equity market performance will be better, and the bond market is likely to enter a 'garbage time'." A person in charge of asset management research at a brokerage in Shanghai told a journalist from a brokerage magazine in China.

Incremental policies boost market confidence.

"Although the Ministry of Finance press conference did not disclose the specific amount, we internally predict that the total scale will be above 6 trillion yuan, and the press conference mentioned that 'the central government still has a large space for borrowing and deficit enhancement,' which will also enhance the market's confidence in subsequent policies." The aforementioned asset management professional stated.

Similar views are widely recognized by institutional professionals. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, analyzed that the incremental scale of fiscal policy in this package will not be less than 4 trillion, exceeding market expectations. This will directly push the GDP growth rate in the fourth quarter to above 5.0%, smoothly achieving the annual growth target of 'around 5.0%', and providing important support for maintaining rapid economic growth of 'around 5.0%' next year.

Northeast Securities also told a journalist from a brokerage magazine in China that the statements related to future fiscal policies in this press conference were relatively positive. Although constrained by legal procedures, this press conference did not provide detailed information on the specific amount of fiscal policy arrangements. However, the statement "the central government still has a large space for borrowing and deficit enhancement" fully demonstrates the strong determination and ability of the finance to achieve revenue and expenditure balance, complete the annual budget target, and support the stable and positive development of the economy.

The strong determination of fiscal efforts may provide further emotional support for the equity market. The bull market trend in the A-share market is still expected, but the bond market may be suppressed.

"This press conference released relatively positive policy signals and reserved sufficient space for subsequent policy efforts. It is expected to effectively support and underpin the equity market, helping the equity market return to an upward trend." Zheshang Securities fixed income analyst Tan Han analyzed that the certainty of the strong performance of the equity market is relatively high, but due to the ongoing process of fundamental repair, the bond market may experience a sideway fluctuation similar to the period of the bull market from 2014 to 2015. The core fluctuation range of the 10-year government bond yield may be 2.10% to 2.20%, with difficulty breaking through the integer point of 2.00% downwards.

"Incremental policies are expected to be introduced one after the other, and the repair of the economic fundamentals is expected to continue. Therefore, it is recommended for investors to remain cautious amid optimism. If the growth target remains unchanged, the possibility of countercyclical regulation has always existed. The judgment to maintain the fluctuation of the 10-year government bond yield in the range of 2.00% to 2.20%, with additional allocation above 2.10%, remains unchanged." Huajin Securities Research Institute fixed income senior analyst Niu Yi.

However, Northeast Securities stated that on the one hand, this press conference did not disclose the specific amount of financial arrangements, and on the other hand, the transmission from policy bottom to economic bottom still requires time. The risk impact of current policy efforts on bond investments is relatively controllable, and the risk of a substantial pullback in the bond market is unlikely.

Possibly better opportunities for credit bonds.

At a meeting on October 12, the Ministry of Finance announced, "It is planned to increase the debt limit by a large scale at one time to replace the hidden debts of local governments, increase efforts to support local debt risk resolution, and provide a detailed explanation to the society after performing the statutory procedures." This means that the debt limit for local governments this year will be significantly raised from the current 46.79 trillion; after the increase, a large-scale issuance of special local government refinancing bonds will be conducted in the fourth quarter for the replacement of local government hidden debts.

For the bond market, this policy may have a more direct impact on credit bonds mainly related to urban investment.

China International Capital Corporation stated that from the perspective of converting debts, capitalizing banks, and supporting developers in completing construction projects, the core of this fiscal policy is actually more focused on alleviating the debt risks of the existing economy and reducing the risks of local governments, urban investment platforms, banks, and developers. From this logic, it is actually more bullish for existing credit bonds, including urban investment bonds, state-owned bank perpetual bonds, and some high-quality real estate bonds.

After all, the decline in existing debt risks corresponds to a decrease in default risks, which means that credit spreads can continue to compress, or the compression of credit spreads is also healthy. This was analyzed by China International Capital Corporation in its latest research report.

Guosheng Securities also stated that the start of a new round of large-scale bond issuance means that local government debts of urban investment will be more replaced by local government debts, and the debt risks of urban investment will be further alleviated. This will directly benefit urban investment bonds. At the same time, it will further reduce the scale of high coupon assets, lower credit spreads, and bring about a further decline in overall interest rates. Additionally, the issuance of national bonds to supplement the capital of large banks will also reduce the demand for the issuance of tier 2 capital bonds by large banks, reduce the supply of tier 2 bonds, and bring positive impacts to tier 2 bonds from a supply perspective. Therefore, the overall credit spreads of bonds will further compress, and bonds of all maturities have additional value for allocation.

Editor/Somer