Say hello to the “Zhou Put.”
After the biggest two-week plunge in China’s stock markets since December 1996, People’s Bank of China (PBOC) Governor Zhou Xiaochuan (周小川) cut interest rates to a record low. The move is reminiscent of a strategy pursued by former US Federal Reserve chairman Alan Greenspan, who cut rates after market meltdowns in what became known as the “Greenspan Put.”
Chinese stocks sank on Friday. The Shanghai Composite Index fell 7.4 percent, taking its decline from its June 12 high to 19 percent, on the cusp of a bear market.
“Similar to the Greenspan Put after Black Monday in 1987, this time it’s the PBOC’s turn to play ‘put’ after Black Friday,” said Larry Hu (胡偉俊), head of China economics at Macquarie Securities Ltd in Hong Kong.
The move raises three questions, Hu said. Should margin financing be banned to prevent over-leveraging? How much volatility will China’s policymakers accept as they open the capital account? How can the PBOC improve its guidance?
One trigger that prompted the stock sell off Thursday and Friday was the central bank’s addition of funds to the banking system on Thursday via reverse-repurchase agreements, a step interpreted as reducing the odds of near-term monetary stimulus.
“These movements confuse the market,” Hu said.
In a two-pronged move late on Saturday, the central bank announced it was cutting the benchmark lending rate by 25 basis points to 4.85 percent and the deposit rate by 250 basis points to 2 percent. Required reserve ratios for some lenders were also to be reduced.
“The rate cut following recent turmoil in China’s equity market gives the impression that Chinese officials are engineering a put, trying to support flagging investor confidence,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC.
The real economy could do with a bit of monetary stimulus. With growth undershooting the government’s target of about 7 percent so far this year, according to Bloomberg’s monthly tracker, economists had been forecasting more rate cuts even before the bull run reversed.
“There are hard economic reasons why the PBOC has eased policy again,” Neumann said. “Earlier rate cuts and liquidity injections didn’t yield the desired traction.”
Zhou is not in Greenspan territory yet — China’s interest rates remain high by global standards and banks’ required reserve ratios still lock away trillions of yuan.
Greenspan, the Fed chairman from 1987 to 2006, pumped money into the economy when stocks crashed early in his tenure. He lowered rates to a then four-decade low of 1 percent after the 2001 recession. That move, along with a hands-off approach to regulation, brought him under fire when the housing bubble and subprime crisis later sank the economy.
Zhou’s dual policy move is a signal of intent, said David Mann, chief economist for Asia at Standard Chartered Bank.
It is hard to ignore the timing.
“It does feel like more than a coincidence that this announcement comes just after the recent sell-off in the stock market,” Mann said.
RECORD BUDGET: TSMC does plan to raise its proposed capital expenditure a lot, and could benefit if Intel outsources more of its production to foundries, analysts said Intel Corp’s earnings conference call on Thursday is expected to clarify the US semiconductor giant’s outsourcing production plans, which would be crucial regarding Taiwan Semiconductor Manufacturing Co’s (TSMC, 台積電) performance, analysts said. “TSMC stands to benefit if Intel outsources more of its fabrication to foundries,” SinoPac Securities Investment Service Corp (永豐投顧) analysts said in a note on Friday. Yuanta Securities Investment Consulting Co (元大投顧) was more cautious, saying that Intel’s contribution initially would be limited, but its outsourcing plans would still highlight TSMC’s leadership in technology, it added. “Intel will continue to manufacture server or high-end central processing units [CPUs], which have higher
MOBILE SMART: The Dimensity 1200 is 22 percent better in terms of performance than its predecessor, and 25 percent more power-efficient, the handset chip designer said MediaTek Inc (聯發科) yesterday unveiled its premium 5G processors — the Dimensity 1200 and Dimensity 1100 — as it vies for a larger slice of the world’s rapidly growing 5G smartphone market. Manufactured using Taiwan Semiconductor Manufacturing Co’s (台積電) 6-nanometer process technology, the Dimensity 1200 processor performs 22 percent better than the previous generation Dimensity 1000+ processor, and is 25 percent more power-efficient, MediaTek said. Chinese smartphone brands Xiaomi Corp (小米) and Realme Mobile Telecommunications (Shenzhen) Co (銳爾覓移動通信) are to be the first adopters of the latest Dimensity chips, the companies said during a virtual media briefing. Xiaomi plans to equip its first
‘BROAD RANGE’: The US Department of Commerce intends to deny a significant number of license requests for exports to Huawei, an industry association said US President Donald Trump’s administration notified Huawei Technologies Co (華為) suppliers, including chipmaker Intel Corp, that it is revoking certain licenses to sell to the Chinese company and intends to reject dozens of other applications to supply the telecommunications firm, people familiar with the matter told reporters. The action — likely the last against Huawei under Trump — is the latest in a long-running effort to weaken the world’s largest telecommunications equipment maker, which Washington sees as a national security threat. The notices came amid a flurry of US efforts against China in the final days of Trump’s administration. US president-elect Joe
From India to China to the US, automakers cannot make vehicles — not that no one wants any, but because a more than US$450 billion industry for semiconductors got blindsided. How did both sides end up here? Over the past two weeks, automakers across the world have bemoaned the shortage of chips. Germany’s Audi, owned by Volkswagen AG, would delay making some of its high-end vehicles because of what chief executive officer Markus Duesmann called a “massive” shortfall in an interview with the Financial Times. The firm has furloughed more than 10,000 workers and reined in production. That is a further blow