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.
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