Details of China Stimulus and Why It will Prop Up China Companies' Share Prices

This week, China's Central Bank (the PBOC) has announced a slew of measures. 02 policy measures are of significant importance to investors in China listed companies.

Quoting from the central bank's website, a summary of the policy measures are:

(i) 500 billion yuan swap facility being able to be usef for stocks ETF or China listed CSI300 shares as collateral and importantly;

(ii) the central bank lending to commercial banks 300 billion yuan of loans at 1.75% interest where china banks will then lend out at 2.25% for share buybacks or founders to increase their stake. This strategy mirrors what Japan has done in the past and this should boost China companies' share prices. 

The PBOC has said it will consider injecting more money for the above 02 measures if it is doing well by doubling the amount allocated.

Significance to the Market

Part (ii) to me is good. China companies are known to be high dividend yielders at 6-9% dividend. Now any company can borrow at a low rate of 2.25% and earn the differential from its own dividend. This possibly points to a boost to many China company share prices until they are of 4-5% dividend level. We could be seeing 50-60% upside in share prices for dividend yielders such as Petrochina/Sinopec/ICBC or even companies like Haidilao.

For (i), companies can now purchase financial and insurance companies can now buy companies or even those of high dividend and in the index as collateral with the PBOC. It helps funds and insurance companies to boost their returns and entices them to buy the blue chip companies of China.

The PBOC is doing what other central banks have done - using liquidity injecting approaches to boost sentiments. As investors, this could result in multi year highs for China companies if the trajectory follows what has happened in USA and Japan stock markets, the effects of their central banks injecting liquidity.

This explains why share prices of China companies have moved up 10-20% this week. In my view, if the PBOC continued support and then supplying more cash as a second tranche, China companies will be in a bullish mode. Companies we can put in our radar are the high dividend yielders especially when founders know they can leverage on the dividend differential to make money. I see 50-60% upside from here.