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Shanghai - China’s stocks swung between gains and losses as traders weighed the impact of lower interest rates after the steepest four-day equity plunge since 1996.
The Shanghai Composite Index was little changed at 2 962.36 at 08:15, after rising as much as 4.3% and falling 3.9% earlier. The cuts in borrowing costs and lenders’ reserve ratios were announced hours after the benchmark measure closed with a 7.6% drop on Tuesday.
Chinese equities have lost $5trn, or half their value since mid-June, as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook.
The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation.
“The struggle between gains and losses suggests that the market doesn’t really know what to make of the policy move yet,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “There might be a chance we could see some consolidation in the markets before investors are confident enough to push higher.”
The PBOC said it will cut the one-year lending rate by 25 basis points to 4.6% and lower the required reserve ratio by 50 basis points for all banks. The move, which follows the biggest devaluation of the yuan in two decades earlier this month, comes amid signs of decelerating growth for the world’s second-biggest economy.
Growth outlook
“The PBOC’s reserve-requirement ratio cut cannot make up for the loss of liquidity resulting from the yuan’s depreciation,” Chia Woon Khien, Singapore-based portfolio manager at Nikko Asset Management Asia Ltd., said in an interview in Bloomberg’s office in Shanghai.
“If we’re lucky, China’s economy will start to recover from the fourth quarter.”
The Hang Seng China Enterprises Index added 1% in Hong Kong, while the Hang Seng Index lost 0.1% as the value of shares traded was almost double the 30-day average for this time of day.
Some Chinese officials argue that falling stocks will have a limited economic impact and the costs of supporting the market are too high, said one of the people, who asked not to be identified because deliberations are private.
Officials who back intervention say tumbling shares pose a risk to the banking system, the people said.
Technical indicators
Tom DeMark, who predicted this month’s selloff in Chinese stocks, said the Shanghai Composite Index may extend its decline by 13% should it stay below a critical technical level on Wednesday.
A failure to close above 3 200, or almost 8% higher than Tuesday’s level, may open the way for a move to 2 590, which would be the lowest since November, according to DeMark, founder of DeMark Analytics. An advance above that level, however, would signal the stock rout may be over, he said.
China’s margin debt has plunged by 1 trillion yuan from its June peak as stock traders close out bets using borrowed money. Outstanding margin loans on the Shanghai and Shenzhen exchanges fell to about 1.25 trillion yuan on Monday from a record high of 2.27 trillion yuan on June 18.
“The prevailing sentiment is still that investors want to cash out, whatever the government does,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong.
“Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while.”
Jittery sentiment
Deutsche Bank AG recommended investors buy so-called H- shares on attractive valuations and an improving economic outlook. The Hang Seng China Enterprises gauge of mainland companies listed in Hong Kong will rally 37 percent by year-end, according to the analysts’ forecast.
The central bank’s move “reaffirmed that the leadership’s policy priority is growth support,” strategists led by Yuliang Chang at Deutsche Bank wrote in a note on Tuesday.
An above- average risk premium in H shares suggests “investors may have priced in some pretty bad scenarios. The market dipped and appeared oversold amid jittery sentiment.”
The four-day, 22% drop in the Shanghai Composite narrowed a premium in yuan-denominated A shares versus their Hong Kong-listed peers to 22% from 40% three weeks ago, according to the Hang Seng China AH Premium index.
