China's version of a "bazooka" was unleashed on September 24th, igniting capital market sentiment, with both the Shanghai Composite Index and the Hang Seng Index in Hong Kong surging by over 4%.

Around 18:00 Beijing time on the same day, the gains of Chinese asset ETFs in the U.S. pre-market trading expanded, with the 3x Bullish FTSE China ETF-Direxion rising by more than 15%, and the 2x Bullish CSI China Internet ETF-Direxion rising by over 11%.

KraneShares China Internet ETF and the iShares China Large-Cap ETF both saw increases of more than 5%.

Several overseas investment banks and asset management institutions have expressed to First Financial Daily reporters that the sustainability of the rebound still depends on the fiscal policy's strength, and investors' focus has turned to the Politburo meeting in October and the subsequent Central Economic Work Conference.

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Large-scale purchases by overseas hedge funds, PB (Prime Brokerage) personnel from two European and American investment banks, told First Financial Daily reporters that overseas hedge fund money had already flowed in, mainly buying into consumer goods, and after noon, hedge fund money surged, especially with the opening of the European market in the afternoon, white liquor (Moutai, Wuliangye) and high dividend sectors were heavily bought.

However, long-term funds (long-only) are moving slowly and are still in a wait-and-see position.

Goldman Sachs stated that the simultaneous significant reduction in policy interest rates and reserve requirement ratios, along with a rare policy easing guidance, shows the decision-makers' concerns about economic growth resistance.

The institution believes this indicates a new round of policy easing in the future to support the real economy.

Nevertheless, more demand-side easing measures (especially fiscal easing) may still be necessary, which is key to improving China's economic growth prospects.

Institutions predict that there will be a 25BP reserve requirement ratio cut in the fourth quarter of this year, and maintain predictions for further cuts and rate cuts in 2025 (25BP cuts in the first and third quarters of 2025, and 10BP rate cuts in the second and fourth quarters).

In addition to reserve requirement ratio cuts, rate cuts, and adjustments to existing housing loan interest rates, the main factor that ignited the market was the central bank's announcement of the creation of two structural monetary policy tools to support the stable development of the capital market - the first tool is a swap facility for securities, funds, and insurance companies, with an initial operation size of 500 billion yuan; the second tool is stock buybacks and increased loans, with an initial quota of 300 billion yuan.

Both can be expanded in scale depending on the situation in the future.

Wu Zhaoyin, the macro strategy director of AVIC Trust, told reporters that the main reason for the long-term downturn in the market was the lack of incremental funds, and now the central bank's creation of these two major policy tools directly targets the stock market, with an initial 500 billion and 300 billion respectively, which will guide retail investor funds into the market.

He mentioned that the central bank is guiding commercial banks to provide loans to listed companies and major shareholders for stock buybacks and increased holdings, with the commercial banks' loan interest rate at 2.25%.

As long as the dividend yield of the listed company is higher than its shareholders' financing cost of 2.25%, the listed company and major shareholders have the motivation to finance and buy their own stocks; if the dividend yield of the fund and insurance investment portfolio exceeds 2.25%, they also have the motivation to finance and buy stocks.

The variable here is the dividend yield of the listed company (or investment portfolio).

Therefore, stocks with a dividend yield above 2.25% will attract more funds (there are many such stocks, and the current dividend yield of the CSI 300 Index is about 3%), or these stocks can enjoy the financial support brought by this policy.

Zhao Wenli, the chief Hong Kong stock strategist of CCB International, told reporters that under the new policy, it is expected that relevant institutions can swap eligible bonds, mid-to-back-end, less liquid stock ETFs, and CSI 300 constituent stocks and central bank's high liquidity bonds and bills, and then use them as collateral for loans in the open market to invest in the stock market.

"We believe this policy will enhance stock market liquidity, enhance institutions' ability to obtain funds and increase their stock holding capabilities.

In addition, buyback-related policies are expected to boost shareholder confidence, stabilize stock prices, and promote the optimization of capital structure for listed companies."

Consumption, high dividends, and the internet are currently the focus of attention.

Overseas hedge funds may be the main force of foreign capital inflows, and industry preferences are quite obvious - consumption, high dividends, and the internet.

An overseas hedge fund person told reporters that for A-shares, the lack of capital inflows is a problem.

The fundraising amount of public funds has been at a low level in the past year, and the new policy provides additional funds, which is welcomed by investors.

The person also mentioned that after yesterday's surge, the valuation multiple of the MSCI China Index is still only 9.3 times, about 10% lower than the fair value.

If the ERP (equity risk premium) can be further reduced, the valuation can continue to be revised upwards, which may bring more upward momentum.

It is worth mentioning that Hong Kong's trading volume on Tuesday set a new high since May, close to 250 billion Hong Kong dollars, while the single-day trading volume in the previous month was often only 60 billion to 80 billion Hong Kong dollars.

The Hang Seng Index broke through the 19,000 point mark in one go.

"A-shares' trading volume on the same day approached 1 trillion yuan, and the increase in Hong Kong's trading volume is even more extreme.

Since overseas investors are underweight in China, they usually start with Hong Kong stocks when increasing their positions, coupled with the Fed's rate cut, which will benefit Hong Kong stocks first."

A large American investment bank's institutional business person mentioned at a customer meeting on Tuesday.

He said that the hedge fund's position in the Chinese stock market is only 6.8%, a five-year low, lower than in February this year, and about 1% lower than the high point in April-May this year, and there is still a lot of room for increase.

At the same time, the current performance driving force of Hong Kong stocks is stronger than that of A-shares - the earnings growth of MSCI China in the first half of 2024 is 12% year-on-year, while the earnings of all A-shares and the CSI 300 are down 4% and flat year-on-year, respectively.

Therefore, performance has driven the recent structural market of the Hang Seng Index.

David Scutt, a senior strategist at Jia Sheng Group, told reporters: "This week, Hong Kong stocks continued to make a big breakthrough.

The price in the market on Monday stopped at the high point of 18,160 on August 30, and then reversed and rose, indicating that this may be the starting point for going long.

On the upside, the key points of 18,476 and 18,766 have been broken through, and the subsequent retesting of the May high of 19,559 opens up the imagination."

Fiscal policy has become the key to the follow-up.

Although the monetary policy has already launched a "bazooka," fiscal policy has always been the focus of attention and the key to activating the real economy.

Nie Yixiang, co-chief investment director and fund manager of Fidelity Fund Management (China), told reporters that the content that exceeded expectations yesterday was mainly reflected in the liquidity support policy for the market, which clearly increased the benefits for large-cap stocks and high dividend stocks.

Monetary policy has exceeded expectations, and whether the subsequent market performance can continue mainly depends on whether fiscal policy is also exerting force.

"If the overall profitability of enterprises cannot be improved, after interest rates fall further, the asset shortage may intensify, and stable high dividend and high liquidity large-cap stocks will have more investment and allocation value.

Before seeing further efforts from the fiscal side, we continue to be optimistic about high dividend stocks and large-cap high liquidity stocks; remain cautious about the consumption and real estate sectors.

Looking forward to the future market, we are looking forward to the follow-up fiscal policy efforts and the end-of-year Politburo meeting to make a positive tone for the economy next year."

He said.

Lu Ting, Chief Economist of Nomura China, told reporters: "Faced with the downward trend of the real estate market, increased fiscal pressure on local governments, and geopolitical challenges, we believe that fiscal stimulus and reform by the central government should be given priority."

He said that the government can provide direct funds to stabilize the real estate market.

In addition, the government may increase pension payments and may also increase transfer payments to alleviate the financial burden on local governments while formulating long-term solutions.

From September 14th to 21st, after excluding the impact of the Mid-Autumn Festival holiday, the sales area of new commercial residential buildings in 30 cities decreased by 65.4% compared to the same period in 2019 (previous week value -62.7%); in terms of second-hand housing, the sales area of second-hand housing in 15 sample cities during the same period turned negative compared to 2019 (-8.8% vs. previous week value 5.6%).

Goldman Sachs Investment Bank believes that the central bank said it will reduce the interest rate on existing loans by about 50BP, which will save mortgage borrowers about 150 billion yuan in interest each year (lower than the previous Goldman Sachs expectation of about 250 billion yuan).

"Policymakers expect that this measure will benefit about 50 million households, or about 150 million people, accounting for a medium proportion of the total number of urban families/population in China.

This means that each household can save about 250 yuan in mortgage interest per month, roughly equivalent to 2%~3% of the disposable income of urban families in 2023, and we believe this may moderately improve family cash flow and stimulate consumption."

However, the institution believes that if the expectation is to be reversed, at least 500 billion yuan of incremental funds are needed, 300 billion yuan for real estate inventory reduction, and 200 billion yuan to help local governments cope with debt burdens.

According to statistics from CICC, in the fourth week of September, the scale of new special bonds to be issued exceeded 500 billion yuan, and the pace of special bond issuance has significantly accelerated.

However, since April this year, although there has been an improvement in infrastructure bidding and new starts, there has been a significant slowdown in September on a month-on-month basis.

At the same time, it takes a certain time to transmit from the start of new projects to the construction side, and it is expected that the growth rate of infrastructure investment within the year may be slightly lower than last year's 8.2%.

Many institutions believe that it is still necessary to closely monitor the Politburo meeting and the Central Economic Work Conference in the fourth quarter, especially whether to further increase the fiscal budget and increase the issuance of government bonds.

At the same time, the U.S. election in November is also worth paying attention to.