China stocks stumble after reserve requirement ratio cut
China-related stocks stumbled on Thursday after the People’s Bank of China (PBOC) cut the reserve requirement ratios (RRR) for banks, believing it is a sign that China’s economy is doing worse than expected.
The two main stock exchanges on the mainland lost ground, with the Shanghai Composite Index dropping 1.18 per cent to close at 3,136.53 and the Shenzhen Stock Exchange Composite Index slipped 0.19 per cent to end at 1,526.11. In Hong Kong, the Hang Seng China Enterprises Index (HSCEI) crawled up a mere 0.18 per cent to finish at 11,789.19.
The PBOC announced on Wednesday it would cut banks’ RRR – the proportion of deposits a bank must keep in cash or place with the central bank – by 50 basis points to 19.5 per cent from Thursday, a move that marks its strongest easing since lowering benchmark interest rates for the first time in two years in November.
The market read the RRR cut as a sign that the government is desperate
“The RRR cut was earlier than expected. The market expected the RRR cut to come after Chinese New Year or early March, when China’s economic data for January and February would be available,” said Vincent Chan, a research analyst at Credit Suisse.
“The concern is China’s economic growth is weak. The market read it that the Chinese government is accelerating the pace of RRR cuts and interest rate cuts. The market read the RRR cut as a sign that the government is desperate,” he said.
“The market expected the RRR cut to be later… the market fears China risks going into deflation later this year,” said Kenny Tang Sing-hing, general manager at AMTD Financial Planning.
One reason for the RRR cut is to offset the large capital outflows from the mainland, said Francis Cheung, managing director of China-Hong Kong strategy at CLSA. “Money left the country, so the RRR cut puts money in the banks.”
As a sign of capital flight from China, the nation’s capital account turned negative in the fourth quarter, Cheung cited. “The capital outflow is a negative sign for the economy. The economy is not good, so money leaves.”
“The economy is pretty weak, so the government needs to ease more. The market and we expect more RRR cuts and interest rate cuts later this year,” Cheung predicted.
CLSA said in a report that the next interest rate cut could happen before the annual meeting of the National People’s Congress next month.
“We expect more easing to come, but given the state of the economy, the easing cycle could be prolonged. The banks are the obvious beneficiaries, but smaller banks will likely benefit the most,” said the CLSA report.
The RRR cut is likely to have a slightly positive impact on the credit profiles of Chinese banks," said Standard & Poor’s senior director Qiang Liao.
“We believe the worsening trend in Chinese banks’ credit performance will continue in 2015 despite the policy easing,” said Liao.
Goldman Sachs said in a note that property, technology, telecoms and financial stocks would be good bets for investors following the RRR cut.
