Morgan Stanley: A-share market stabilization tools have room for further use; financing costs imply approximately 10% upside

How much capacity remains in the market stabilization facilities?

Chinese financial regulators reportedly plan to meet securities firms, funds and major banks on 2 November to discuss further use of capital market support tools and possible improvements to the relending facility for share buybacks and stake increases. Morgan Stanley is watching for the meeting’s final conclusions and any new measures.
The report said the existing 300 billion yuan quota for listed companies’ share buybacks and stake increases and the 500 billion yuan quota for share purchases by institutions and insurers have been consolidated into a shared total of 800 billion yuan. The relending rate has fallen from 1.75% at launch to 1.5%. Including a bank spread of up to 50 basis points, the indicative financing cost for listed companies and major shareholders is approximately 2%, depending on market pricing; the maximum loan term has been extended to three years.
As of 18 October, A-share companies had submitted approximately 1113 applications, with a combined maximum requested loan amount of approximately 233.3 billion yuan; the loans may not yet have been fully drawn. Based on this, Morgan Stanley estimates that at least 550 billion yuan of capacity remains, meaning at least about seventy percent is unused.

As of the close on 30 October, the CSI 300 dividend yield was 2.2%. Comparing this with the facility’s financing cost of approximately 2%, Morgan Stanley believes the gap implies approximately 10% upside for the index from its level at the time; this estimate depends on the full mobilization of market stabilization and institutional funds.
On the same day, the CSI 300 traded at 11.6 times forward earnings over the next 12 months, approximately 5%–10% away from what the bank calls the historical valuation floor of 10–11 times. The bank believes a fall in valuations into that range over the following weeks would also present a relatively good buying opportunity.

Besides domestic policy details, Morgan Stanley is watching whether US stocks, particularly the AI trade, can stabilize. The bank believes that as A-shares become more concentrated in AI and the capital expenditure supercycle, their correlation with US stocks has also risen noticeably.
US stocks still face uncertainties including the outcome of the US midterm elections, the situation in the Middle East and its impact on oil prices. Reviewing past episodes, the bank said A-shares have often reached their absolute bottom within one to two months after the state-backed ‘national team’ publicly and prominently signaled its entry into the market.

Given that domestic market stabilization forces cannot control US stock performance, the bank favors companies with sound fundamentals for which buybacks are relatively attractive in light of financing costs. Its list screens CSI 300 constituents rated overweight by Morgan Stanley using a dividend yield above financing costs as a criterion, and includes 28 stocks; the table heading uses a dividend-yield threshold above 2.2%.