Investors look past Beijing’s debt clean-up plan as minister pledges more proactive policy

Investors in Hong Kong and China were initially disappointed by Beijing’s approval of a 6 trillion yuan (US$835 billion) bond quota to resolve the hidden debt of local governments, though a number of market participants said there was reason to believe that more economic relief is on the way.

Even though the debt-swap programme was largely in line with investor expectations, the Hang Seng Index fell more than 2 per cent on Monday morning, while mainland markets saw narrower losses. But investors expect more fiscal support to be on the way after finance minister Lan Foan said supportive policies could be more proactive next year.

“The market should not be disappointed by the additional 6 trillion yuan debt swap,” said Wang Qi, the chief investment officer of UOB Kay Hian’s wealth management division in Hong Kong. “This is not a small number and there may be more to come.”

Markets in Hong Kong and China had their first chance to react to Beijing’s plan for local government debt on Monday after an eventful last week, when Donald Trump reclaimed the White House and the Federal Reserve cut borrowing costs for a second consecutive month with a quarter-point reduction. Hong Kong’s de facto central bank followed suit with a quarter-point cut, and then six major lenders in the city trimmed their cost of borrowing to the lowest level in two years, a move that may help to arrest a decline in the world’s most expensive property market.

“The massive debt swap plan means a shift in policies, and there’ll be more upside room for the fiscal deficit next year,” said Wu Gang, deputy head of research at HSBC Jintrust Fund Management in Shanghai. “We’ve also observed a noticeable improvement in government spending since September. It’s foreseeable that loose government expenditure is on the way in the fourth quarter. Therefore, there’s a big chance of a pickup in China’s economy.”

Larry Hu and Yuxiao Zhang from investment bank Macquarie acknowledged that investors were disappointed with the size of the programme to clean up local government debt. But they said expectations for a “massive fiscal package” were unrealistic, “because the policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way”.