China and Hong Kong stocks slide, with Shanghai Composite Index declining to two-year low
Cut in reserve requirement ratio announced on Sunday by People’s Bank of China ‘doesn’t signal a shift in monetary policies’, as the central bank ‘continues to focus on deleveraging’, say analysts
Hong Kong and mainland China stocks declined on Monday, after a cut by the People’s Bank of China in the amount of cash commercial banks must put aside as reserves was viewed as inadequate to stem losses on equities held back by the US-China trade war and deleveraging.
The Shanghai Composite Index retreated by 1.1 per cent, or 30.42 points, to 2,859.34, its lowest close since June 2016. The sale of mainland equities by overseas investors through the exchange link with Hong Kong touched in a four-month high on Monday. Foreign investors sold a net of 3.7 billion yuan (US$565.7 million) worth of mainland-listed shares, the most since February 6, according to Bloomberg data.
In Hong Kong, the Hang Seng Index was down by 1.3 per cent, taking the city’s stock benchmark to a level not seen since December 2017.
The Chinese central bank’s decision on Sunday to lower the reserve requirement ratio by half a percentage, releasing 700 billion yuan (US$107.1 billion) into the market, cannot be viewed as the authorities boosting liquidity or paring down deleveraging, according to Shanghai-based brokerage Shenwan Hongyuan Group and Fidelity International. Five hundred billion yuan released from the cut will support debt-to-equity swap programmes, and the remaining 200 billion yuan will be used to aid the funding of smaller businesses, the PBOC said in a statement.
“The cut in the reserve requirement ratio doesn’t signal a shift in monetary policies, given the specific purpose of how the released capital will be used,” said Xie Yunxia, an analyst at Shenwan Hongyuan. “It shouldn’t be interpreted as a one-way and all-out loosening of liquidity.”
The Shanghai Composite has already shed 14 per cent this year amid intensified trade tensions between the United States and China and corporate bond defaults, making it the worst-performing benchmark among the world’s major equity markets. A further 0.4 per cent loss from Monday’s close will take the index into a bear market, which is generally defined by technical traders as a 20 per cent decline from a high.
“We do not expect a significant change in the current funding costs, given the current policies and RRR cuts aimed at providing liquidity, but not at lowering financing costs,” said Freddy Wong, a portfolio manager at Fidelity in Hong Kong. “The Chinese government continues to focus on deleveraging in order to push through structural reforms and other monetary policies such as debt-to-equity swaps.”
Airline stocks sank after crude oil rose and the yuan weakened to a six-month low, reducing the repatriated value of Chinese airlines’ foreign debt denominated in US dollar terms. The yuan dropped by as much as 0.6 per cent to 6.5412 against the US dollar on Monday.
Air China tumbled by the 10 per cent daily limit to 9.78 yuan in Shanghai. Its Hong Kong-traded stock shed 6.8 per cent to HK$8.08. China Eastern Airlines also slumped by 10 per cent to 6.83 yuan and its shares slid by 7.2 per cent to HK$5.68 in Hong Kong. China Southern Airlines sank by 9.7 per cent to 9.08 yuan.
Property developers and insurers were also among the biggest decliners. Poly Real Estate Group slumped by 7 per cent to 13.08 yuan and China Vanke slid by 5.7 per cent to 26.49 yuan. New China Life Insurance dropped by 3.7 per cent to 42.93 yuan.
In Hong Kong, the Hang Seng Index slid by 377.31 points to 28,961.39. The Hang Seng China Enterprises Index, or the H-share gauge, lost 1.2 per cent.
Developers and casino operators were among the worst performers. Country Garden Holdings slumped by 5.8 per cent to HK$14.74, as the biggest decliner on the Hang Seng Index. Galaxy Entertainment Group dropped by 3.8 per cent to HK$61.30, and Sands China fell by 3.6 per cent to HK$42.35.