Re-energising Chinese equities

The reaction in Chinese equities after the PBOC cut rates for the third time in six months vindicated the view that looser monetary policies will lift stock valuations.

The People's Bank of China (PBOC) headquarters stands in Beijing, China
Source: Bloomberg

The Shanghai Composite (SHCOMP) jumped 3%, similar moves was seen in CSI (+2.9%) and A50 (+2.0%).

This helped pare last week’s sharp losses but the Index is still below the key 4500.

Judging from its track record, the SHCOMP is likely to quickly retest the mark in post-easing exuberance.

In the month after the rate cut decision, the index climbed almost 20% after the 40bps reduction in November 2014.

In February this year, SHCOMP rallied near 15% after another PBOC interest rate cut, albeit of a smaller magnitude (25bps).

True to its form, the analysts are now expecting another reduction to the reserve ratio requirement (RRR). More easing is anticipated to be in the pipeline as cost of funding remains tough. Clearly, the PBOC is in an easing mode and would keep its hands on the policy levers, should economic conditions continue to weaken.

Further action is possible with China’s growth still under pressure, especially if upcoming data does not align with authorities’ expectations. In my view, calls for the RRR cut will gain more credence if China continues to see significant capital outflows.

AH premium widens again

Interestingly, the H-shares lagged behind the rally of its A-shares counterpart. The AH premium index, which measures the gap between A-shares and H-shares, rose towards 130. This suggests that the price premium of A-shares to H-shares once again increased to nearly 30% after dropping for most of last week.

Ahead of the Asia open

China’s ‘bright spot’ may not be enough to lift sentiments in the Asian session amid global jittery. We have seen overnight markets closing lower. We are calling for CSI300 4663 -27, Hang Seng 27636 -82, Nifty 8302 -23, and MSCI Singapore 389.52 -0.9.

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