Chinese small-caps surge most in seven weeks on lending rate reform, Shenzhen revitalisation plan
- Shenzhen’s ChiNext jumps 3.5 per cent and Shenzhen Composite Index adds 3.1 per cent
- New method of generating lending prime rate will cut borrowing costs, KGI Securities and Citic Securities say
Smaller companies in Shenzhen, considered China’s technology hub, have gained the most in seven weeks on optimism a new market-based method of pricing loans to be introduced by the country’s central bank will lower corporate funding costs, and after Beijing rolled out a plan for bolder reforms in the city.
The ChiNext gauge of start-ups surged 3.5 per cent at the close on Monday, capping its biggest gains since July 1. The Shenzhen Composite Index, which tracks all the 2,000-plus stocks on the bourse that is dominated by small-caps, advanced 3.1 per cent.
Risk appetite was bolstered after the People’s Bank of China said over the weekend it will link the lending prime rate to the cost of medium-term funding commercial lenders get from the central bank, a move aimed at bringing down borrowing costs for Chinese companies, particularly the smaller ones.
Stocks were also boosted after Beijing said on Sunday it will build Shenzhen – a testing field for its opening up policies – as a model city, pledging to implement deeper reforms, including a wider revamp of state-owned enterprises and the introduction of cryptocurrency payments.
“The reform of the lending rate will most probably lead to a decrease in borrowing costs,” said Ken Chen Hao, strategist at KGI Securities in Shanghai. “That will help to boost liquidity in the market and benefit smaller companies. So the rebound in small-caps will carry on in the next few months.”
The new lending prime rate, which is expected to be announced on Tuesday and calculated on the average of bidding by a wider array of banks, is likely to drop to as low as 4.25 per cent, compared with the existing rate of 4.31 per cent, according to Citic Securities, China’s biggest publicly traded brokerage. Citic also said the change would make monetary policies more flexible and improve support for corporate financing.
Beijing’s plan to revitalise Shenzhen also mentions the ChiNext market. China aims to push ahead with new rules on refinancing and merger and acquisitions for the board, as well as a registration-base system for initial public offerings.
ChiNext, which was created a decade ago to facilitate funding for China’s start-ups, now competes with Shanghai’s Science and Technology Innovation Board, also known as the Star Market.
Chinese stock traders find small is beautiful
The ChiNext index has climbed 30 per cent this year and is the best-performing gauge among the major benchmarks tracking Chinese stocks. It has almost more than doubled the gains on the Shanghai Composite Index.
Traders have increased their bets on small-caps in anticipation that earnings growth will bottom out and improve after a barrage of companies made one-off write-offs of asset impairment losses linked with goodwill.
