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Cautious Asia

Despite the news of fresh China monetary stimulus and oil rebound, US stocks closed lower on the 29 Feb, as month-end selling accelerated into the close.

PBOC Building
Source: Bloomberg

The S&P 500 fell 0.8% to close below its 50-day moving average. Major US indices posted their third straight monthly losses, with S&P 500 and Nasdaq ending -0.4% and -1.2%, while the Dow managed to eke out a +0.3% gain in February.

It is hard to say how Chinese equities will perform after PBOC cut reserve ratio by 50 basis points. China stock index futures are notorious for getting it wrong, as the onshore markets are still driven by local investors, and a select few qualified foreign institutional funds. Nonetheless, based on the FTSE China A50 futures traded on the Singapore Exchange, we could see some upside in the China stock market, at least at the beginning.

Needless to say, positive Chinese sentiments would be extended partially to the rest of Asia. However, with the mixed and weak leads from overnight markets, any positivity may be restrained. Australia and Japan have already started off on a cagey note.

 

More Chinese stimulus

The PBOC cut reserve requirement ratio for the biggest Chinese banks by 50 basis points to 17%, after a four-month hiatus. The lower ratio will be effective today, 1 March. The Chinese central bank said in a statement that the policy move was aimed at guiding stable growth in credit in addition to fostering appropriate monetary and financial conditions for supply-side structural reform.

According to Bloomberg Intelligence estimate, the cut will inject about CNY 685 billion into the financial system. Blue-chip shares may benefited from the move, given its correlation to the Chinese economy.

The return to using the RRR signals that Beijing is prioritising supporting growth to other considerations. Moreover, the use of the RRR instead of the policy rate may not affect capital outflows as much. Having said that, it remains to be seen how the latest action will affect the yuan exchange rate. We could take cues from the yuan midpoint fixing, where the USD/CNY was fixed at 6.5385, lower from yesterday’s 6.545

Meanwhile, China is looking at announcing plans for a financial super-regulator to oversee banking, securities and insurance, with the PBOC having a greater say over the economy, according to Bloomberg, citing people familiar with the matters. Part of the criticism over the handling of the stock collapse last year was that the relevant agencies do not have a coordinated plan. Therefore, such a proposal would be positive for investor confidence.

 

Chinese Manufacturing disappoints

Manufacturing conditions in China remain challenging as the official PMI gauge disappointed consensus estimate, coming in at 49.0 versus 49.4 expected. The data extended its stretch of contraction for a record seven month, since August 2015. While seasonal effects could have distorted the reading, as the country celebrated Chinese New Year for a week in February, the run of below 50 readings underlined the weak manufacturing narrative.

 

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