BackChina’s stocks rise to highest since 2008 on reserve-ratio cut
Shanghai Composite Index rose 1.1% in volatile trade as investors weighed the reserve-ratio cut against new restrictions on using leverage for share trading
Premium
Hong Kong: China’s stocks rose to a seven-year high on expectations monetary stimulus will bolster the economy after the central bank cut the amount of cash lenders must set aside as reserves by the most since the global financial crisis.
Industrial companies surged the most in Shanghai, with China Railway Group Ltd and China Shipbuilding Industry Co. jumping by more than 9%. Poly Real Estate Group Co. led a rally for property developers, while Agricultural Bank of China Ltd advanced 2.1% in Hong Kong after the People’s Bank of China said reserve-requirement ratios will be cut 1 percentage point from Monday.
The Shanghai Composite Index rose 1.1% to 4,333.99 at 1:13pm, after swinging between gains and losses six times as investors weighed the reserve-ratio cut against new restrictions on using leverage for share trading. The China Securities Regulatory Commission announced measures on Friday to clamp down on the use of shadow financing for equity purchases and increase the supply of shares available for short sellers.
“Many mainland investors expect the market to extend gains, led by reserve ratio-sensitive sectors such as banks and property," said Yen Chiu, a Hong Kong-based trader at Shenwan Hongyuan Group Co. “The market will close in the green. Trading will be volatile though as some people are being cautious after the regulator’s move."
Shanghai trading volumes were 66% above the 30-day average, while 100-day volatility was the highest since January 2010, according to data compiled by Bloomberg. The CSI 300 Index added 1.2%. The Hang Seng China Enterprises Index in Kong Kong fell 0.4%, while the Hang Seng Index retreated 0.5%. The Bloomberg China-US Equity Index decreased 1.4% on Friday.
Growth concerns
The Shanghai gauge has jumped 84% in the past six months, the most among 93 benchmark indexes globally, fueled by record leverage and speculation the government will lower borrowing costs to boost growth in the world’s second-largest economy.
Chinese investors have been piling into the equity market after the central bank cut interest rates twice since November and authorities from the CSRC to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. The second reduction in reserve ratios this year comes after a report showed the slowest economic growth in six years and on signs capital is leaving China, causing a shortage of liquidity.
More easing
The reserve-ratio level will decline to 18.5%, still high by global standards, based on previous statements. The ratio will be reduced by another percentage point for rural financial institutions, 2 additional percentage points for Agricultural Development Bank and a further 0.5 percentage point for banks with a certain level of loans to agriculture and small enterprises.
The moves suggest the central bank has formally given up its “neutral policy stance" and more easing will follow to curb deflation and downside risks in the economy, said Minggao Shen, Hong Kong-based head of China research at Citigroup Inc.
The Shanghai property index gained 4.6% for the biggest advance among the five industry groups. China State Construction Engineering Corp. jumped 9.1%. Gauges of telecom and industrial shares in the CSI 300 surged at least 5.7% for the best performance among the 10 groups. China United Network Communications Ltd jumped 10%.
CSR Corp. and China CNR Corp. added more than 7%. The merger of China’s two biggest trainmakers is poised to create the second-largest industrial company by market value after the companies led this month’s surge in Shanghai shares.
Cooling measures
Measures of technology and drug stocks in the CSI 300 slumped at least 0.8% for the biggest losses among groups. Wangsu Science and Technology Co. slumped 2.5%. Beijing Tongrentang Co. lost 3.6%.
Regulators banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers. Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks after monetary stimulus sparked a world-beating rally in the nation’s benchmark equity gauge. Permitting mutual funds to lend their holdings to short sellers would make it easier for bearish traders to bet on a retreat.
“Given the speed of recent moves, it is maybe unsurprising that the CSRC would want to take some of the stream out of the market particularly as further loosening measures are taking place," Robert Buckley, managing partner for Asia at Aviate Global LLP in Hong Kong, wrote in a report.
Mainland traders have opened a record 10.8 million new stock accounts this year, more than the total number for all of 2012 and 2013 combined, data from China Securities Depository and Clearing Co. show.
The Shanghai Composite rallied 6.3% last week for a sixth week of gains, sending valuations to 21 times reported earnings, the highest since April 2010 and more than double last year’s low, according to data compiled by Bloomberg. The MSCI Emerging Markets Index trades at 13.7 times. Bloomberg
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
