Shanghai Jumps 2.2% to 3,686.17 as Beijing Cuts Stock Buyback Financing Rate
Key Facts
The Shanghai Composite rose 2.2% to 3,686.17 on Wednesday, November 4, rebounding from the year’s low recorded on Tuesday, according to the Associated Press. The advance came on the day a cut in the People’s Bank of China’s relending rate for financing share buybacks and acquisitions took effect. Banks’ applications under the program exceeded 200 billion yuan, equivalent to $30.0 billion in Reuters’ conversion, Reuters reported. The lower financing cost gives banks an additional incentive to lend to companies seeking to buy back their shares or acquire stakes. But the amount of applications recorded does not mean the full sum has already been disbursed or converted into market purchases.
The central bank cut the relending rate for these purposes by 0.25 percentage point to 1%, with the change effective Wednesday, according to Reuters. The program is intended to finance companies’ share buybacks and stock acquisitions, while applications exceeding 200 billion yuan indicate the level of interest in using the facility. Reuters said banks submitted applications above that threshold, which does not necessarily mean loans were approved or funds paid out. The move coincided with the index’s rebound from its annual low, putting the liquidity measure at the forefront of Wednesday’s session news. The index’s move in that session also remained tied to the broader market context and developments affecting Chinese stocks in the preceding weeks.
Shanghai’s rebound followed a weak month for Chinese stocks: the CSI 300 fell 8.5% in October, its worst monthly performance since early 2016, according to Reuters via MarketScreener. Technology and semiconductor companies faced heavier pressure, with the STAR 50 falling 40% in less than four months through October 26, wiping out about $480 billion in market value, according to a Reuters report cited by Investing.com. The report quoted a Chinese fund manager as saying: "We see the bubble bursting now," referring to the retreat in artificial intelligence stocks after their rally. It also reported that AI stocks accounted for 42% of China’s market capitalization and 57% of trading value in mainland and Hong Kong stocks, according to Goldman Sachs data. These figures place the gains in a single session against a broad earlier decline, without by themselves establishing a shift in the market’s direction.
Investors’ attention during the session also extended to the backdrop of the U.S. midterm elections. The Associated Press reported that Democrats won majorities in both chambers of Congress, and cited Capital Economics as saying the scale of the gains did little to change near-term policy expectations. The firm attributed this to Democrats’ lack of a filibuster-proof majority in the Senate and the president’s ability to veto legislation. That assessment differs from viewing the elections as a source of sustained pressure on Chinese stocks; the agency said the index rebounded from its annual low on Wednesday. Shanghai’s rise combined the effect of a specific domestic measure to support stock-buyback financing with a global backdrop that, according to the cited assessment, showed no major shift in the near-term U.S. policy outlook.
On the domestic data front, growth in China’s services activity slowed in October. The services purchasing managers’ index came in at 50.8, down from 51.6 in September and below the market forecast of 51.7, according to Investing.com. The reading reflects a slower pace of expansion than in the previous month, although it remained above the 50 level that separates expansion from contraction in the index. The October reading was released on November 4, so it measures activity in the previous month rather than on the announcement date. The data provide economic context for the stock-market session’s gains, while the direct monetary move focused on lowering the cost of financing share buybacks and acquisitions.