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PBOC's move could help economic restructuring. Photo: Reuters

China's central bank makes move to ease fears of stock sell-off

Central bank's action to cut level of cash banks must hold could stabilise markets spooked by regulatory clampdown on margin trading

The central bank has cut the level of cash that banks must hold, in the second such action this year that highlights the leadership's concerns after the first quarter saw the slowest economic growth since 2009.

The 1.0 percentage point reduction in the reserve requirement ratio to 18.5 per cent, announced by the People's Bank of China yesterday, follows a 0.5 percentage point cut on February 4 and two cuts to official interest rates since November last year. The move may free up an estimated 1.2 trillion yuan (HK$1.5 trillion), boost financial markets and reverse earlier predictions of a broad sell-off today.

Markets had been bracing for a steep drop following a mainland regulatory announcement on Friday night that authorities would clamp down on high-risk margin trading and widen the scope for short selling.

By cutting the reserve requirement ratio, banks will be able to pump more money into the economy and help offset recent capital outflows.

In a statement on its website, the PBOC said the cut would "further enhance the ability of financial institutions to support restructuring".

In global share markets, falls for Chinese firms listed on US and European bourses were followed by sharp drops in the futures market. The FTSE China A50 Index futures for April dropped more than 6 per cent, while contracts on the H-share index lost 3.3 per cent.

Margin account balances on the mainland hit 1.15 trillion yuan on Friday, more than triple the 263 billion yuan at the end of June, when the Shanghai Composite Index plumbed new lows.

Aggressive lending via brokerages and umbrella trusts, which allow for more leverage because the borrowing involves over-the-counter small-cap stocks, has helped drive Shanghai's benchmark index up 32 per cent this year.

Any sharp correction in stock prices would leave borrowers at risk, something regulators are mindful of given the large number of ordinary retail investors.

On Saturday, the regulator moved to allay market fears of a clampdown, saying on its microblog that the measure was not intended to encourage short selling, nor depress the market. "Investor protection is part of developing the capital markets," wrote Deng Ge, a spokesman for the China Securities Regulatory Commission.

In Hong Kong, the Hang Seng Index is up 16.5 per cent since mid-March, helped in part by mainland investors buying up dual-listed stocks trading at discounts to their mainland-listed A-share counterparts.

In his weekly blog, the city's finance chief warned investors of the possibility of large market fluctuations in the near future. "It is just a matter of time for a market to adjust when it has aggregated a certain amount of increases. That is absolutely not strange at all," Financial Secretary John Tsang Chun-wah wrote.

Analysts have been calling for further stimulus to help revive the slowing mainland economy and an ailing property sector. Industrial output and retail sales both slowed in March, while first-quarter GDP growth came in at 7 per cent, against 7.3 per cent in the last quarter of 2014.

A US$113 billion drop in foreign-exchange reserves in the first quarter pointed to continual capital outflows.

This article appeared in the South China Morning Post print edition as: PBOC move may ease fears of stock sell-off
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