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China stocks dip despite Beijing’s larger-than-expected reserve ratio cut
China’s A-shares fell on Monday as profit-taking after a recent rally in shares and moves to curb margin trading eclipsed the central bank’s deeper than expected cut in the country’s reserve requirement ratio (RRR). A-shares fell 70 points or 1.64% to 4217.08 points on Monday.
Christina Wang 20 Apr 2015

China’s A-shares fell on Monday as profit-taking after a recent rally in shares and moves to curb margin trading eclipsed the central bank’s deeper than expected cut in the country’s reserve requirement ratio (RRR). A-shares fell 70 points or 1.64% to 4217.08 points on Monday.

 
On April 17, the China Securities Regulatory Commission (CSRC) said it would prohibit brokers from taking part in margin financing, where securities firms lend cash to investors to buy stocks. The rise of margin trading has been a key driver behind a wild surge in China’s share prices that worried regulators. Over the past month, MSCI China index rose 21.6%, and CSI300 index was up 22.3% in the period.
 
The move to curb margin lending has overshadowed news of Beijing’s reserve-ratio cut. On Sunday, the People’s Bank of China (PBoC) lowered its reserve requirement ratio by 100 basis points to 18.5%, its biggest cut since November 2008.
 
The central bank also announced an additional 100bp ratio cut for rural financial institutions, a 200bp reduction for Agricultural Development Bank of China, and another 50bp for state banks and joint stock banks with a certain level of loans to agriculture and small enterprises. This is the second universal reserve ratio cut in recent months after the PBoC’s 50bp cut in February.
 
Analysts believe the monetary easing policy will enable China’s economy to improve in the second quarter.
 
Steven Sun, head of China equity strategy at HSBC said the liquidity injection is a political goal to create wealth effects in both A-share and H-share markets, so that Beijing can utilize the stock market to stimulate innovation and entrepreneurship and channel liquidity to the real economy and hedge economic downside risk. The move is also seen to facilitate state-owned enterprises (SOE) deleveraging and other reforms, says Sun.
 
HSBC expects the PBoC to cut the policy rate by another 25 bps within second quarter and implement a 100 bps reserve-ratio cut and a 25 bps policy rate cut in the second half. BoAML expects rate cuts totalling 50bps and another 50bps reserve ratio cut for the rest of 2015.
 
In the increasingly volatile market, Gao Ting, head macroeconomics, UBS CIO Wealth Management identifies six investment opportunities: heavily discounted H-shares; mid-sized and small caps; "Internet+"; stocks with high overseas growth potential; SOE reform beneficiaries; and Hong Kong blue-chip local companies.
 
HSBC’s Sun also reiterates the bank’s positive view on the H-share market and suggests investing in financial stocks should benefit the most from a monetary easing. PBoC’s latest rate cut confirms HSBC’s view on the H-share market to buy on dips, if any, Sun adds. Hang Seng Index fell 558.19 points, or 2.02% on Monday to close at 27,094.93 points.
 
 
 

 

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