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The 25 basis point cut to benchmark rate and the 50 basis point reduction in the reserve requirement ratio (RRR), effectively 26 August and 6 September respectively, are estimated to infuse CNY 650 to 700 billion into China’s financial system. That is over half of the average amount of new yuan loans (CNY1100 billion) during 1H 2015.
When we take a closer look at China, the obvious winners from the double policy easing were blue chips. China A50 traded with gains for most of Wednesday, while the CSI 300 erased their gains, dragged by selling in smaller cap shares on the Shenzhen stock exchange.
Chinese lenders generally prefer to lend to state-owned companies, instead of smaller private enterprises. This explains why the policy easing tends to benefit the share prices of larger companies.
We may have a larger issue at hand, looking at the situation, the problem of commercial banks favouring state-owned enterprises (SOEs) and shunning smaller private businesses, means the additional liquidity injection may not have a meaningful impact on growth. Secondly, the real interest rate could be well above 10%, if you considered negative growth in producer price index. Borrowing may still be too expensive. Thirdly, SOEs may not need to borrow more for capital expenditure because of the overcapacity in many industries.
Furthermore, rate cuts are meant as a more powerful response to countering the current liquidity tightness, and complementing the recent wave of short-term liquidity injections (e.g. reserve repo). They are not going to boost growth. This is why investors are not convinced that we will see a strong rebound in the stock market. Certainly, the equity losses are narrowing in percentage terms, and subsequent signs of stabilisation in the coming sessions will definitely improve confidence. But more needs to be done, particularly on the fiscal front.
There are also talks that the authorities may be looking at stamp duty cuts when purchasing stocks. Surely, every bit counts, although a coherent strategy to boost growth should be the main focus. That said, there may be no escaping a tough period of adjustment for the Chinese stock markets.
The thought that the market has not responded to the authorities’ measures imposed on participants, does not mean that we need stronger or tougher initiatives. Instead, targeted measures could be more effective. It’s tempting to try and fix everything at the same time, but the truth is China is still a developing economy. There are still many issues to be tackled.
In Singapore, the Straits Times Index (STI) is stabilising within 2850-2900. A couple more days of sideways movements could suggest that this is an opportune time to go long. A technical indicator I like to watch has been flashing a potential buy signal - none of the 30 STI companies are trading above the 50-day moving average.
Over the past five years, whenever the percentage of member companies falls below 10%, a bounce will follow shortly after. Zero percentage is screaming ‘buy’. However, to be confident of the ‘buy’ signal, we need to see confirmation that the STI is consolidating. Similarly, the MSCI Singapore Free Index, similarly to IG’s Singapore Blue Chip, is exhibiting the same patterns, holding around the 320 level.
There was a view that uncertainty surrounding the Fed’s first rate increase in a decade was the main catalyst for the stock rout. Many are associating the lack of clarity of timing to the taper tantrums we have seen in 2013.
Perhaps a case of self-fulfilling prophesy ensued. Nevertheless, the Jackson Hole symposium this week may provide more insights into the Fed’s thinking, where Fed Vice-chair Stanley Fischer will be speaking, in place of Chairperson Janet Yellen.