MNI: Advisors Call For More Measures To Support Chinese Stocks

State-controlled Chinese funds need to increase equity purchases and IPOs have to be more strictly scrutinised if the country’s stock market is to rise out of its downward trajectory, policy advisors and economists told MNI, calling liquidity support announced by the People’s Bank of China earlier this week insufficient given tech sector deleveraging and weak domestic demand.

The PBOC’s CNY100 billion Securities, Funds, and Insurance Companies Swap Facility operation and its 25-basis-point cut in the relending rate for share buybacks to 1% aim to put a floor under the market, shoring up expectations, but they are not enough to boost prices, said Zong Liang, former chief researcher at Bank of China, who noted that overall utilisation of the two facilities remains a fraction of their combined ceiling of CNY800 billion. 

A secular downtrend in stocks is likely to be unacceptable to Chinese policymakers, who are attaching more importance than ever to the equity market, said Zong, calling for tighter scrutiny of IPOs and fresh equity purchases by large state-owned funds, as well as policies to stabilise the broader economy. (See MNI INTERVIEW: China Advisor Calls For More Public Investment)

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University, said officials need to work on increasing the utilization of the SFISF, which allows institutions to swap stocks, ETFs and bonds for high-grade central-bank bills and treasury bonds to finance market purchases, and of the relending tool incentivising loans to key shareholders for stake buybacks. 

The two tools were pivotal in catalysing the rally which followed their introduction in September 2024, said Zhao, suggesting that institutions obtaining swap quotas should now prioritise investing in companies committed to share buybacks. The recent market pullback, stemming from concerns over previously high-performing tech stocks, has been compounded by weaker demand as China restructures its economy, he said.

LEVERAGED OUTFLOWS

However, Liu Feng, director at the China Chief Economist Forum, said that emergency tools, including ordering state-owned funds to boost their stock holdings, can only halt the decline in stocks rather than independently produce a sustained uptrend.

Whether the stock market can bottom out in Q4 will depend on if the outflow of leveraged capital from the tech sector eases, and whether high-frequency data points to improvements in private investment and household consumption, said Liu, though he added that the current price-to-earnings (PE) ratio of about 13 times for the CSI 300 Index is now reasonable, and that the extent of the correction in core AI-related stocks has already approached levels seen during comparable historical periods.

“Monetary easing and market-stabilisation measures can help anchor index levels, but any recovery in corporate earnings must be validated by data from the real economy,” said Liu, highlighting investor caution at a time when private investment is contracting at a double-digit rate and the property market has yet to find a floor. (See MNI: China's Investment Likely To Decline In 2026 - Advisors)

Margin balance slid from CNY2.7 trillion on Sept 23 to CNY2.5 trillion on Oct 19, contracting by CNY172 billion, with net outflows in 12 out of 13 trading sessions, he noted, adding that policymakers’ signals of support for market stability have proved ineffectual, as market pricing is now more focused on the actual efficacy of policies.

For the moment, China lacks incremental capital willing to take on valuation risks based on fundamentals, he said.

TECH EQUITIES

The China Securities Regulatory Commission has already signaled support for including major index heavyweights and leading tech firms in the targeted buyback relending facility.

Zhao noted that support measures must remain targeted, focusing on index constituents and tech leaders. While tech valuations are still not depressed, as long as companies continue to advance innovation, underscoring the sector's long-term potential, upside momentum remains intact, he noted.

MNI INTERVIEW: Service Growth Solid Amid Supply Concerns - ISM

The U.S. services sector will continue to grow at a solid pace through the end of the year -- and so will prices -- until the conflict in the Middle East is resolved, Institute for Supply Management services chair Steve Miller told MNI Wednesday. 

The ISM services index fell 0.4 percentage point in October to 54.5, slightly below market expectations. The report showed a slower expansion in demand and quicker hiring as well as continued elevated prices. An index at 50 represents the dividing line between expansion and contraction.

"I would expect more of the same until resolution happens on the the war," Miller said. "I'm expecting mid-50s for the rest of the year for the PMI and probably through at least February." 

The developments with the war in the Middle East, especially as Democrats take control of Congress next year, will be crucial for the supply side of the services economy, he said. 

TARIFFS AND FUEL

Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains, while many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers, he said. 

The prices paid index eased 1 point to 73.0, 3.8 pp above its 12-month average of 69.2. October saw a "very big number," Miller said. There were 19 commodities reported up in price, zero down in price, and three in short supply.

"The last three months we did 72.6, 74, and 73. It looks like we are seeing increases in that stuff flowing through, and more to come," he said. This indicates that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated, even if they do not increase from current levels, he said. (See: MNI INTERVIEW: Hot Economy To Keep Fed Hiking - Andolfatto)

Miller surmises some of the sluggishness for firms to pass on higher costs is due to annual pricing agreements. "There's been a significant popular expectation that this [war] was really just going to be a short-term blip and things would get resolved and would get back to normal and that just hasn't," Miller said. 

HIGH BACKLOG 

The new export orders index surged 8.3 ppts to 55.2, after falling 9.4 ppts the previous month. Recent months have been volatile, Miller said. "There isn't anything that came through in the commentary that says something has changed significantly," he said. 

The employment index increased 1.3 pp to 51.4, which is 2.1 pp above its 12-month average of 49.3. Miller noted firms' commentary around difficulty in finding the right talent for why there wasn't an even higher employment index.

The backlog index increased 1.4 ppts to 58, its highest reading since it hit 58.3 in July 2022. 

"With that backlog being as high as it is, I would bet that it's labor-related and the reason why the number isn't higher is just inability for people to find the right staff, as supported by some of the commentary," he said.

MNI INTERVIEW: Riksbank Head Prefers Gradual Tightening

Riksbank Governor Erik Thedeen told MNI he would prefer a gradual approach to further tightening rather than front-loading further hikes after Wednesday’s 25-basis-point increase in the policy rate to 2%.

Thedeen said at the press conference following the Executive Board’s decision that hiking now had reduced the need to do more later, but in an interview he pushed back against the idea that he favoured front-loading further moves, with the Riksbank’s published rate path pointing to a little under two more hikes for a total of three in the tightening cycle.

Talk about front-loading suggests "We hike all of the assumed 75 basis points in one shot. That we don't do. So we always have the option to rethink, adjust the path," Thedeen said.

"We see inflation picking up in the beginning of next year, but if you do it (tightening) a little bit in advance, you need to do less. So I think that's why it's prudent. But we do it ... gradually," he added.

There is no consensus among analysts over when the next hike will come, and Thedeen is not in favour of pre-commitment.

"This is a hike done because of rising demand and rising cost pressures, especially in the corporate sector, and ... we think we know that inflation pressure is going up. So do we need to call that front-loading? I think it's prudent monetary policy," he said. (See MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal)

POLICY STILL STIMULATIVE

The policy rate is now approaching the mid-point of the Riksbank's most recent assessment of the neutral range from 1.5 to 3.0%, but Thedeen said he did not regard 2.25% as necessarily being the dividing line between stimulative and restrictive settings, given the difficulty of estimating R-star.

 "Our take is that, for sure 1.75% was slightly expansionary. The economy is growing, borrowing is increasing. So there are clear signals that this has been slightly, at least, expansionary,” he said, adding that 2% also appears to be below the neutral rate and in stimulative territory. "I will always try to talk less about the 2.25 because we have a range, period."

The Riksbank will regularly revisit its estimates of R-star, which, he noted, some models have suggested is being pushed higher by increased borrowing, particularly related to AI. But Thedeen added that to base policy on such assumptions would be dangerous. 

STRONGER KRONA

Another factor weighing on inflation has been the partial recovery of the krona after a bout of weakness, and Thedeen accepted this might be demonstrating the exchange rate channel of monetary policy in play.

"What drives the currency is extremely hard to say in advance, but for sure, interest rate differential has something to do with it, right? ... We will never hike only to get the krona to strengthen. But if the hike is in line with our inflation target policies, for sure that, everything being equal, would also help the krona," he said. (See MNI INTERVIEW: Not Clear Krona Undervalued - Riksbank Head)

"I would say that our hiking messaging and now actual action has some implications for ...the krona," he said, noting that the spread between euro area and Swedish rate paths has narrowed as the Riksbank has moved on to a tightening track.

TIGHTENING FINANCIAL CONDITIONS

The financial tightening from sharp rises in sovereign debt yields and market rate paths which has become a factor for other central banks is less important for Riksbank rate-setting calculations, Thedeen said, noting that Swedish businesses and households tend to be less exposed to longer rates than in other jurisdictions.

"Typically both corporates and households borrow at variable rates. So, what happens in the long end is not irrelevant, but it's not as relevant," he said.

Thedeen added that he was not convinced by the argument, heard in other central banks’ jurisdictions, that higher yields exert disinflationary pressures which could reduce the need for higher central bank rates.

Such arguments are "a little bit strange, because if that's in expectation of tightening, if you don't deliver the tightening ... rates will come down, right? Or they will go up because inflation fear is coming back, so the risk premium is going up, right? ...I think it's very hard to say exactly what implication that increase in yields has," he said.

MNI INTERVIEW: Hot Economy To Keep Fed Hiking - Andolfatto

A vibrant U.S. economic expansion and persistently elevated inflation are likely to keep the Federal Reserve on a tightening path until there is evidence that price pressures are abating, former St. Louis Fed economist and policy advisor David Andolfatto told MNI. 

“My best guess is the data are going to continue to come in hot, so I kind of expect that the Fed's going to be compelled to continue to have to raise rates,” he said in an interview. 

Andolfatto said the AI investment boom and large fiscal deficits are both likely raising the neutral rate of interest, though the eventual destination for rates is unclear and the pace of hikes will depend on the flow of data and geopolitical events. 

“I personally believe the neutral rate is rising. We saw the investment numbers come in pretty strong and textbook theory says that as demand for investment rises that's going to tend to put upward pressure on real interest rates,” he said. 

“The second factor is the amount of U.S. Treasury paper the global market is expected to absorb. I can't see how that can do anything but put upward pressure on what we would call a neutral rate.”

DEMAND BOOM

He said the Fed’s decision to hold rates steady in October was defensible given conventional wisdom that central banks should not overreact to supply shocks, but he would have preferred to see them hike again given the data backdrop. 

“I would have leaned on the side of raising because I see the demand side being very, very strong. Unemployment is low, consumption growth is strong, GDP is pretty strong,” said Andolfatto, now a professor at the University of Miami Business School. (See MNI INTERVIEW: Ex-Fed’s Mester Sees Little Need For Hike Pause)

“Inflation has been running well above target for quite a long time, and I do think there is a danger at some point that this becomes baked into expectations. Although to be fair to the decision of the FOMC, the breakevens, the marketplace measures of inflation expectations, continue to remain fairly well anchored so that does give the Fed a lot of leeway.”

REACTION FUNCTION

He would like Fed Chairman Kevin Warsh to more clearly explain how the central bank will react to incoming data, distinguishing such a reaction function from the idea of forward guidance that Warsh dislikes. 

“Any individual move isn't as important as the strategy, the policy rule –  something, of course, that the chair is not wanting to communicate,” he said.  

Andolfatto said he is all for policymakers refraining from making any precommitments to policy moves in future meetings. But he added they do need to clarify how policy will behave if the inflation problem appears intractable. 

“I'm very clear about how the Fed should react if data comes in a particular way, and if [inflation] does come in high, the Fed should likely start raising pretty aggressively,” he said. “I’m a very big proponent of forming contingency plans. And that’s just another way of saying, expressing the Taylor rule or the policy rule very explicitly, something again the chair has refused us to do. I think that's a big mistake."

He does not know what changes or proposals any of Warsh’s five task forces will offer, but is hopeful that the process will be constructive. “It is probably a useful exercise to sit back and reflect on the broader policy frameworks,” said Andolfatto.

MNI RIKSBANK WATCH: Hikes And Sees More To Come

The Riksbank delivered an anticipated 25-basis-point hike in the policy rate to 2.0% on Thursday after its November meeting and changed its guidance to state that further tightening was likely.

The new guidance stated that "it is likely that the policy rate will be raised further in the
coming year, in line with the policy rate forecast in September,” upgrading September’s statement that the Riksbank’s Executive Board expected tightening would "begin this year.” 

The Riksbank’s best estimate is for the rate path to peak after perhaps two more hikes, Governor Erik Thedeen told a press conference. Inflation risks have risen, he said, adding that if the Riksbank had waited too long to hike, the necessary tightening would have been greater and potentially damaging to the economy.

September’s previous rate forecast was compatible with a second hike in the first quarter of 2027, but the timing of the next move remains unclear, together with whether and how far the Riksbank will want to move into restrictive territory, with 2.25% the middle of its neutral range.

MOUNTING INFLATIONARY PRESSURE

There were no new forecasts to accompany the November decision, but the updated economic commentary highlighted mounting inflationary pressure stemming from the Iran war shock even without pass through into second-round wage effects.

"The causes of supply disruptions remain, which increases the risk that inflation will be too high", and "several indicators of inflationary pressures remain above normal, supporting the assessment that both (target) CPIF inflation and underlying inflation will rise above 2% next year," the commentary stated.

Recent data had shown inflation holding well below the 2% target, but the Riksbank’s board said this reflected the impact of fiscal measures including a VAT cut and that underlying pressures were mounting.

"Producer prices excluding energy have recently risen rapidly,” it said. Stripping out fiscal measures, "CPIF inflation was 3% in September" and ex-energy was 1.6%.

Economic activity has also proven to be resilient, showing the recovery on track, the Riksbank said.

MNI BOE WATCH: MPC To Hike, But Path Forward Unclear

The Bank of England is widely expected to hike rates to 4% in the first policy move since December 2025 on Thursday, but its guidance is likely to remain ambiguous as to whether more hikes are coming, given the absence of second-round inflation effects so far from higher energy prices.

Bank rate has been held at 3.75% since the outbreak of the Middle East conflict in what the Bank has described as an "active hold," and the most recent September vote was split six-three for unchanged rates. 

However, the continuation of the Iran war means that Governor Andrew Bailey, and Deputy Governors Sarah Breeden, Clare Lombardelli, and Dave Ramsden are all expected to flip and vote for a hike, given their comments since the last meeting. (See MNI POLICY: BOE's Focus On Energy Supply As It Swings To Hikes)

But, with the MPC still split over the force of the inflationary impulse, guidance is likely to remain close to its language since March, which has indicated that "the committee stands ready to act as necessary.” The MPC could indicate that future policy developments will be data-dependent, though without any signal to endorse market pricing, which implies three subsequent hikes.

The Bank's July Monetary Policy Report included a box investigating the discrepancy between the rate path implied by market pricing and analysts' expectations, suggesting that some of the tightening implied by the OIS swap curve is caused by risk premia.

SECOND ROUND EFFECTS

Members have discussed the potential for second-round inflation effects through wages, but it seems the majority are not willing to wait before acting.

"If we were to wait for the sort of the picture of second round effects to fully emerge ... It's most likely we would have waited too long," Bailey said at an OMFIF event in October. (See MNI POLICY: Lack Of 2nd-Round Effects Weighs On BOE Hawkishnes)

External MPC Members Catherine Mann and Megan Greene, alongside Chief Economist Huw Pill, are expected to vote for a hike again. Greene has said the risks of waiting to act outweigh the damage done by hiking too aggressively in her individual paragraph.

Even assuming subdued second-round effects, the BOE’s new forecasts are still likely to show inflation heading over 4%.

The UK has seen above-target inflation for much of the past five years, with September CPI rising by 3.5%. Nonetheless, the official fiscal watchdog, the Office for Budget Responsibility, estimated in its forecasts alongside the Oct 28 budget that there will be no real wage growth in 2027. 

"These second-round effects will be less inflationary than those following the previous energy price spike in 2022, as a significantly looser labour market restricts workers’ capacity to bargain for higher wages," it said in its Economic and Fiscal Outlook.

OBR Budget Responsibility Committee member David Miles told MNI that the large number of very small policy changes at the budget should not affect the BOE's decisions. (See MNI INTERVIEW: Budget Broadly Neutral For BOE- OBR's Miles)

MNI POLICY: Lack Of 2nd-Round Effects Weighs On BOE Hawkishnes

The Bank of England’s guidance is likely to remain non-committal towards future tightening after a widely-anticipated rate hike later this week, with the centre of gravity on a divided Monetary Policy Committee not yet persuaded that higher energy prices are generating second-round effects, MNI understands.

Given the splits on the MPC, something similar to its collective guidance since March, that "the committee stands ready to act as necessary”, is likely to be repeated on Thursday. This could take the form of a suggestion that future policy developments will be data-dependent, though without any signal to endorse market pricing which implies three subsequent hikes.

So far, many MPC members consider that second-round effects has been the proverbial dog that didn’t bark. November’s Monetary Policy Report could well reprise its July language on the labour market, noting that so far there have been "few signs of second-round effects" and that these effects "will probably be moderate." 

Governor Andrew Bailey referred to second-round effects in remarks at the IMF meeting in Bangkok last month, saying that "to the extent we've seen evidence, so far it's been quite subdued." Deputy Governor Dave Ramsden has also said he is sanguine about labour market developments.

However, even assuming subdued second-round effects, the new MPC forecasts are still likely to show inflation heading over 4%. While job vacancies have trended down, unemployment is tracking lower than the BOE assumed, which may suggest less slack than thought.

NOVEMBER MPR NOT DEFINITIVE

The Bank of England is continuing to try to more fully understand labour market developments, and its February Monetary Policy Report will be more comprehensive, incorporating a supply-side stock take and completion of research on recent data showing gains in productivity. (See MNI POLICY: BOE Explores Patchy UK Productivity Gains From AI)

MPC members have also faced a challenge to make sense of the impact of disruptions to complex oil supply chains. While November's central projection will still be conditioned on crude oil and gas futures curves as proxy measures for the energy shock, MPC members and Bank staff have spent time exploring the oddities of the market rate OIS curve, including the wedge between analysts' lower modal path for Bank Rate and the higher mean OIS pricing.

MPC member Catherine Mann, for one, has openly questioned whether curves showing oil prices falling back to pre-crisis levels are believable. At a Treasury Select Committee hearing, Bailey and Ramsden cited maintenance, the wedge between crude and refined products prices, diesel, and jet fuel prices as elements to watch.

But, while side models can capture some of these various energy effects, the Bank is unlikely to publish any alternative measures of the energy shock. (See MNI INTERVIEW: Central Banks Underplay Oil Risk- Baumeister)