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More Easing Ahead
More Easing Ahead. Following the weakening of a number of key economic indicators in August, we believe that China’s government will step up its stimulus policies in the coming weeks and months.
The People’s Bank of China last week pumped 500bn yuan of liquidity into banks and cut the 14-day repo rate following the release of poor August economic data.
While structural reforms will continue and balanced growth remains a key priority, we believe targeted stimulus will be accelerated to ensure growth meets the government’s 7-8% target.
A gradual ratcheting up of targeted monetary and fiscal stimulus, together with expected increased inflows into domestic A-shares as the Shanghai-Hong Kong Stock Connect program goes into effect in mid-October should support the continued strong performance of A shares as we move into Q4 2014 and beyond.
He who treads softly goes far
Disappointing data reported over the past month is likely to serve as a catalyst for further policy stimulus in the next few months in our view. While toeing the official line that reform takes precedence over everything else, Premier Li Keqiang has also reminded local governments of their “inescapable responsibility” to meet growth targets. Keen not to be perceived as going back to the ‘old China’ ways of pursuing growth for growth’s sake, the stimulus is likely to remain more subtle than the CNY 4trn ‘bazooka’ used in 2008. At the same time, the government has the capacity and policy conviction to see that the growth target of 7-8% is met.
While there have been no broad-brush cuts in reserve requirement ratios or lending rates since 2012, the government and the central bank have been actively easing policy since April (see table below).
A large part of the stimulus since April has been delivered by the central bank, the People’s Bank of China (PBoC). The PBoC has the capacity to act quickly – as we saw last week – and can separate itself from some of the Central Government’s reform initiatives.
The table below is far from exhaustive, with local governments in particular having undertaken a number of stimulus activities of their own. However, with the probe into corruption, local governments have been unusually reticent, shying away from highlighting their activities. Nevertheless, policy adjustments to house purchase restrictions for example are likely to go a long way to helping the slowing housing sector see new sources of demand.
The case for more easing
The absence of inflation constraints
The PBoC has substantial capacity to stimulate the economy without raising inflation anywhere near its target of 3.5%. In August inflation slipped to 2.0% from 2.3% in July. Indeed if it is serious about the target, it will need to stimulate demand as it is unlikely that a significant supply-side shock is going to raise inflation to 3.5% in the near-term.
Compensating for shadow-bank deleveraging
While most shadow-banking activities sit within the oversight of the China Banking Regulatory Commission, a small portion does not. Fears of excessive credit growth in the shadow-banking sector has led to pull-back in trust loans (lending by non-bank, deposit taking institutions). Additionally loans that have been taken off balance-sheet by banks (by “undiscounting” bankers’ acceptances) are increasingly being kept on balance sheet. With the onus of credit intermediation falling back on formal banks and with loans remaining on their balance sheet, the PBoC needs to help State banks free-up lending capacity so that credit can be directed to the real economy.
Shadow banks lend and pay depositors on commercial terms, in contrast to many state banks. They arguably direct credit to growing sectors of the economy more efficiently than state banks. If this period of shadow bank deleveraging/banking renaissance continues, loan growth may have to increase more substantially to get credit into the right parts of the economy. The PBoC’s encouragement would therefore be necessary to facilitate this process.
Export growth alone is not enough
Export growth has been surprising strong, while import growth has been relatively muted. While that will help boost GDP figures for the quarter, it is not guaranteed to continue indefinitely.
Indeed with the renminbi appreciating against the dollar, which in turn is appreciating against most other currencies, Chinese exports are getting more expensive for recipient countries
Also lower import growth in China, could hurt demand for Chinese exports from its partner countries, creating a negative feed-back loop.
With China seeking to rebalance its economy away from being an exporter of goods lower down the value chain, the need to stimulate internal demand is clear.
Property markets need micro-targeted policy assistance
As discussed in the August China Macro Monitor, while developers have displayed some cautious optimism by increasing building activity, demand is currently weak as many potential buyers are taking a ‘wait-and-see’ approach. So while captive demand exists with urbanisation continuing unabated, a lack of confidence could contribute to a downward spiral in demand. A decisive policy shock could break this mind-set and avoid the build-up of excess housing. Given that housing supply-demand balances vary widely across provinces and cities, the policy moves will likely have to be carefully targeted with local governments taking the lead in implementation.
China A-Shares continues to rise
Over the past month, the China A-share index has continued to increase, although the soft economic data has capped its gains.
The successful completion of a practice session last weekend will likely see the Shanghai-Hong Kong Stock Connect go live in mid-October as planned. We believe that the Connect initiative will allow better arbitrage between the Hong Kong and Shanghai exchanges, narrowing the current premium Hong Kong stocks have over those trading on the mainland (see Shanghai-Hong Kong Stock Connect: A Boost For China A Shares). A-share discounts to H-shares have been steadily narrowing over the past two months, but still stand at 4%.
The application of quotas favours flows to the mainland over outflows to H-Shares in Hong Kong and will increase the number of investors in the China A-share market.
The Connect does not however link up the Shenzhen exchange to Hong Kong and therefore broad China A indices (which track stocks on both the Shanghai and Shenzhen exchanges) offer investors a compelling alternative to buying stocks directly
Investors have additionally benefited from yuan appreciation, with the China A Share index priced in US dollars.
While most economic data last month was disappointing, the flash release of HSBC/Markit’s purchasing manager indices for September came in as a positive surprise, indicating a potential increase in industrial activity is on its way. Domestic equity markets reacted positively to the news.
We anticipate as government and central bank easing gradually ratchet up in the coming weeks and months, and foreign investors increasingly focus on the extremely beaten down valuation of the A-shares market relative to major developed equity benchmarks and their own history, that A-Shares will continue to outperform.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
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Michael Saylor’s bold Bitcoin bet and Strategy’s risk analysis
Strategy (formerly MicroStrategy) has amassed a staggering $43 billion in Bitcoin, positioning itself at the forefront of the corporate “reserve race.” Under the leadership of Bitcoin maximalist Michael Saylor, the company now boasts an $84 billion market cap. But with such an aggressive strategy, how sustainable is its approach—and what risks lie ahead? We break it down in today’s analysis.
Bitcoin price technical analysis: Where are the liquidation levels?
A drop below $72,000 could flush longs, while a breakout above $90,000 may squeeze shorts. One key positive indicator is that Bitcoin continues to print higher lows since March 10, which preserves a bullish market structure in our view. Dive into our technical analysis.
What are real-world assets and why do we need tokenization?
Imagine owning a slice of a skyscraper or a piece of fine art with just a few clicks. Tokenization, the act of converting ownership rights to real-world assets (RWAs) into tradable tokens, has surpassed $10 billion in on-chain value, unlocking global 24/7 access to once-exclusive markets with liquidity, efficiency, and yield. Find out how it works.
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
Since President Trump appointed Mark Uyeda as acting SEC chair two months ago, many investigations into crypto businesses have been dropped, as the SEC moves away from regulation by enforcement and works to create a framework for digital assets. As regulations become clearer and news flow turns more positive, crypto prices—which dropped sharply this week—should begin to better reflect the new regulatory landscape in the US.
We believe this regulatory shift could ultimately help trigger the next leg of the current bull run, as investors better understand the significance of regulatory clarity and seek to acquire bitcoin and altcoins at what we believe are currently very favorable levels.
Market Highlights
SEC Dismisses Crypto Enforcement Actions
The SEC dropped its enforcement actions against crypto-related companies Kraken, Consensys, and Cumberland DRW.
This indicates a shift in SEC’s regulatory approach, favoring clearer guidelines over enforcement actions. Such a pivot could foster a more predictable environment, encouraging innovation within the sector.
Banks to Engage in Crypto Activities
The FDIC has rescinded previous guidelines which prevented financial institutions from engaging with crypto activities without prior sign-off.
By removing bureaucratic hurdles, banks may more readily offer crypto-related services, potentially leading to broader adoption and integration of digital assets.
Bitcoin ETFs Inflow Streak Surpassed $1 Billion
US spot Bitcoin ETFs have recorded a 10-day inflow streak exceeding $1 billion marking the longest such streak in 2025.
This underscores growing institutional and retail investor confidence in Bitcoin as an asset class that helps increase market stability and possibly paving the way for the approval of other crypto-based financial products.
Market Metrics
All NCITM constituents had negative performance last week, with XRP (-10.8%) and UNI (-10.7%) seeing the steepest declines. ETH also experienced a sharp drop (-9.1%), contributing to NCITM’s underperformance relative to BTC (-2.9%). The NCITM -4.2% decline reflects a broader risk-off sentiment in the crypto market, as investors reassess their positions amid ongoing macroeconomic uncertainties.
NCITM (-4.2%) extended its underperformance last week, deepening year-to-date losses. Traditional indices like the S&P 500 (-1.5%) and Nasdaq 100 (-2.4%) saw smaller declines. The gap between crypto and other risk assets continues to widen, while gold has emerged as the top performer in 2025, gaining nearly 20% amid ongoing macroeconomic uncertainties. This trend highlights a growing risk-off sentiment, with investors shifting toward defensive assets and away from high-volatility investments.
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