Chinese stocks erased earlier gains and closed 1 percent lower yesterday, after an injection of more money into the system by the central bank failed to impress investors who are worried about an ongoing crackdown on high-leverage trading.
The yuan and money rates dipped after the People’s Bank of China (PBOC) cut banks’ reserve requirement ratios by 50 basis points, a widely expected stimulus move to support the world’s second-biggest economy.
“The cut was largely priced into the stock market [already], but it has reconfirmed an important message to investors that China’s monetary cycle has firmly shifted to the loosening camp,” Fidelity Worldwide Investment portfolio manager Jing Ning (寧靜) wrote in a note to clients. “The next question is whether this is followed by a rate cut by the PBOC. We will not see the impact of last November’s rate decision on the economy until the end of this quarter.”
Weighed down by a cooling property market, industrial overcapacity and slowing investment, China’s economy grew at its slowest pace in 24 years last year and is expected to cool further to about 7 percent this year, even with additional stimulus.
China’s factory sector unexpectedly shrank for the first time in nearly two-and-a-half-years last month and firms see more gloom ahead, an official survey showed on Sunday, raising expectations that policymakers would have to take more action to forestall a sharper slowdown.
In Shanghai, the CSI300 Index closed down 1 percent after surging 2.5 percent at the open, while the Shanghai Composite Index ended down 1.2 percent after opening up 2.4 percent.
Blue chips fell across the board, but the ChiNext Composite Index ended up 0.9 percent.
“Small and mid-caps were less impacted by margin trading investigations that were targeted at blue chips and we’re seeing that reflected in the way various sectors of the market are performing today,” Datong Securities Dalian-based analyst Li Zheming (李哲明) said. “If these easing policies continue, we may see a more positive reaction from the market than we did today.”
Shares have been under pressure since last week on news that the stock regulator is probing margin trades in the latest efforts to rein in speculation in the market, which has gained about 40 percent over the past few months.
In the currency market, the yuan opened at 6.2560 per US dollar and was at 6.2516 in late afternoon trade, 44 pips away from the previous close.
As the economy cools, money has been flowing out of China, putting downward pressure on the currency and prompting large state-owned banks to step in to sell US dollars to ensure the yuan’s weakness does not trigger even larger outflows.
ANZ analysts believe the cut in the required rate of return would inject about 600 billion yuan (US$95.96 billion) into the banking system, though questions remain over whether the money would fund real economic activity or be channeled into speculation like bigger bets on the stock market.
“We maintain our view that the authorities will not depreciate the currency, as that would risk even more capital outflows, which could prove to be destabilising,” ANZ strategists wrote in a daily note.
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